We analyze the implications of linking the compensation of fund managers to the returnof their portfolio relative to that of a benchmark—a common solution to the agencyproblem in delegated portfolio management. In the presence of such relativeperformance-based objectives, investors have reduced expected utility but markets aretypically more informative and deeper. Furthermore, in a multiple asset/marketframework we show that (i) relative performance concerns lead to an increase in thecorrelation between markets (financial contagion); (ii) benchmark inclusion increasesprice volatility; (iii) home bias emerges as a rational outcome. When information iscostly, information acquisition is hindered and this attenuates the effects oninformativeness and depth of the market.
Add to Cart by clicking price of the language and format you'd like to purchase
Available Languages and Formats
Prices in red indicate formats that are not yet available but are forthcoming.