Uninformed investors (the principal) often delegate investments to institutions (the agent) with information advantages. However, conventional linear benchmarked contracts tend to cause excessive pegging to the benchmark and thus price distortion of stocks in the benchmark. This paper studies...

In the presence of moral hazard and costly information acquisition, we show that absolute performance pay and benchmarking naturally arise as part of the contract between investors and active managers. The commonality in compensation incentives across funds, however, gives rise to externalities....

The optimal contracts in portfolio delegation under general preferences are characterized when the underlying state variable is not contractible, and the principal must rely on the final returns of portfolios to design the compensation schemes for the fund manager. We show that the optimal...