Incentive Schemes and Innovative Portfolios

Authors

  • Gino Loyola Universidad de Chile
  • Yolanda Portilla Universidad Diego Portales

Abstract

This article characterizes the properties of the compensation scheme of delegated portfolio management that would lead to the selection of high risk-high return portfolios. In particular, it provides conditions under which a non-monotone payment structure emerges as an optimal contract, which rewards extreme results and punishes moderate ones.

Keywords:

Executive compensation, delegated portfolio management, nonmonotone incentive schemes, non-monotone likelihood ratio property