Optimal Asset Management Contracts With Hidden Savings
Sebastian Di Tella, Yuliy Sannikov
Econometrica · 2021 · Volume 89 · Issue 3
Abstract
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.
Keywords
Dynamic contracts, hidden savings, precautionary savings
Enable JavaScript for citation tools and additional paper interactions.