Econometrica: May 2021, Volume 89, Issue 3

Optimal Asset Management Contracts with Hidden Savings
p. 1099-1139

Sebastian Di Tella, Yuliy Sannikov

We characterize optimal asset management contracts in a classic portfolio‐investment setting. When the agent has access to hidden savings, his incentives to misbehave depend on his precautionary saving motive. The contract dynamically distorts the agent's access to capital to manipulate his precautionary saving motive and reduce incentives for misbehavior. We provide a sufficient condition for the validity of the first‐order approach, which holds in the optimal contract: global incentive compatibility is ensured if the agent's precautionary saving motive weakens after bad outcomes. We extend our results to incorporate market risk, hidden investment, and renegotiation.

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Supplement to "Optimal Asset Management Contracts with Hidden Savings"

This Online Appendix extends the results of Di Tella and Sannikov (2016) to incorporate hidden investment, aggregate risk, and renegotiation. The case with no hidden investment and price of aggregate risk  π = 0 yields the expressions in the paper.

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Supplement to "Optimal Asset Management Contracts with Hidden Savings"

This zip file contains the replication files for the manuscript.

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