Multi-market Delegated Asset Management

   (391 K)

This paper studies optimal contracting in delegated asset management when a fund manager can exert unobservable effort and take unobservable investment positions in multiple markets. A key insight is that while giving the manager flexibility to invest in multiple markets increases investment efficiency, it weakens the link between fund performance and the manager's effort in his designated market, thus increasing agency cost. Building on this tradeoff, our model explains the existence of funds with narrow investment mandates, and provides a set of testable implications for a varying degree of investment flexibility across funds. These results shed light on capital immobility in financial markets, market segmentation, and the architecture of financial institutions.

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