Linear contracts are popular in delegated portfolio management. This paper studies the incentive of linear performance-adjusted contracts in delegated portfolio management under a VaR constraint with a principal-agent model and numerical analysis. It is shown that a linear performance-based...

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...