We thank two anonymous referees and the editor, David de Meza, for many constructive comments. We also thank David Blake, Norvald Instefjord, Steve Satchell, Ron Smith and Joel Sobel for helpful discussions.
Relative Performance Evaluation Contracts and Asset Market Equilibrium*
Article first published online: 31 OCT 2005
The Economic Journal
Volume 115, Issue 506, pages 1077–1102, October 2005
How to Cite
Kapur, S. and Timmermann, A. (2005), Relative Performance Evaluation Contracts and Asset Market Equilibrium. The Economic Journal, 115: 1077–1102. doi: 10.1111/j.1468-0297.2005.01033.x
- Issue published online: 31 OCT 2005
- Article first published online: 31 OCT 2005
- Date of submission: September 2002 Date of acceptance: September 2004
We analyse the equilibrium consequences of performance-based contracts for fund managers. Managerial remuneration is tied to a fund's absolute and relative performance. Investors choose whether or not to delegate their investment to better-informed fund managers; if they delegate they choose the optimal contract subject to the fund manager's participation constraint. We find that the impact of relative performance evaluation on the equilibrium equity premium and on portfolio herding critically depends on whether the participation constraint is binding. Simple numerical examples suggest that the increased importance of delegation and relative performance evaluation may lower the equity premium.