Vesa Ozerturk | Southern Methodist University (original) (raw)

Papers by Vesa Ozerturk

Research paper thumbnail of Media access, bias and public opinion

European Economic Review, Aug 1, 2022

Research paper thumbnail of Direct sale of information when precision is unobservable

Canadian Journal of Economics, May 1, 2004

This paper studies the incentives of an information seller to provide precise information when pr... more This paper studies the incentives of an information seller to provide precise information when precision is not observable and investors with rational expectations can extract information from the equilibrium asset price. I show that the seller can verify her precision by employing a non-linear contract. I derive the equilibrium fee for information as a function of the seller's incentives, the sales volume, and buyers' trading intensity. I also analyse the implications of allowing the seller to trade on her own account for truthfulness and precision choice. JEL Classification: G11, G14, D42 La vente directe d'information quand la pre´cision n'est pas observable. Ce me´moire e´tudie les incitations d'un vendeur d'information a`fournir de l'information pre´cise quand la pre´cision n'est pas observable et que des investisseurs qui ont des anticipations rationnelles peuvent extraire de l'information du prix d'e´quilibre d'un actif. L'auteur montre que le vendeur peut ve´rifier sa pre´cision a`l'aide d'un contrat non line´aire, et de´rive le prix d'e´quilibre pour l'information comme fonction des incitations du vendeur, du volume de ventes, et de l'intensite´de transactions des acheteurs. On analyse aussi les implications qu'entraıˆne la possibilite´pour le vendeur de transiger pour son propre compte sur le choix du degre´de pre´cision et de ve´rite´.

Research paper thumbnail of Media access, bias and public opinion

European Economic Review

I develop an electoral competition model in which an incumbent seeks to influence public opinion ... more I develop an electoral competition model in which an incumbent seeks to influence public opinion by strategically controlling the media's access to information. I show that the incumbent's optimal access strategy balances her demand for positive coverage with the public's demand for credible coverage. The media's access increases with the competence of politicians over issues under public focus. Controlling media's access can be instrumental in influencing public opinion, especially in the hands of popular incumbents. Persistence of key election issues, however, decreases the effectiveness of media access control by incumbents.

Research paper thumbnail of Direct sale of information when precision is

This paper studies the incentives of an information seller to provide precise information when pr... more This paper studies the incentives of an information seller to provide precise information when precision is not observable and investors with rational expectations can extract information from the equilibrium asset price. I show that the seller can verify her precision by employing a non-linear contract. I derive the equilibrium fee for information as a function of the seller's incentives, the sales volume, and buyers' trading intensity. I also analyse the implications of allowing the seller to trade on her own account for truthfulness and precision choice. JEL Classification: Gi1, G14, D42 La vente directe d'information quand la precision n'est pas observable. Ce mem- oire &tudie les incitations d'un vendeur d'information 'a fournir de l'information precise quand la precision n'est pas observable et que des investisseurs qui ont des anticipations rationnelles peuvent extraire de l'information du prix d'6quilibre d'un actif. L'aute...

Research paper thumbnail of Board Independence and Managerial Incentive Contracting

We present a model of CEO compensation where a board of directors which is not completely indepen... more We present a model of CEO compensation where a board of directors which is not completely independent from the CEO set CEO pay. We show that the board’s monitoring intensity and the equilibrium pay-performance sensitivity of CEO’s pay are increasing in the board’s independence from the CEO. JEL Classification: G30, G32

Research paper thumbnail of Moral hazard, skin in the game regulation and CRA performance

International Review of Economics & Finance, 2017

This paper investigates the implications of the "issuer skin in the game" regulation for the rati... more This paper investigates the implications of the "issuer skin in the game" regulation for the rating accuracy of a credit rating agency (CRA). The analysis shows that, as well mitigating a moral hazard problem on the issuer's side, skin in the game requirements can also improve the rating accuracy of a CRA involved in the sale. The results also link the accuracy of the CRA's ratings to the severity of the issuer's moral hazard problem. A more nuanced skin in the game rule that accounts for the specifics of the underlying security class can be more desirable rather than the proposed "one size fits all" rule.

Research paper thumbnail of Credit Attribution and Collaborative Work

SSRN Electronic Journal, 2019

We examine a dynamic model of teamwork in which the public attributes credit for success based on... more We examine a dynamic model of teamwork in which the public attributes credit for success based on its perception of individual efforts. The collaborative behavior varies starkly depending on the shape of marginal effort cost, or project's "difficulty." In the unique (interior) equilibrium, higher ability collaborators work less and thus receive lower credit and payoff for "easy" projects, while the reverse holds for "difficult" projects. Despite free-riding, the team equilibrium may involve over-investment. Social efficiency requires over-rewarding collaborative work and under-rewarding solo work. The incentives to team up and the impact of effort monitoring on credit attribution are also investigated.

Research paper thumbnail of Information Gatekeeping and Media Bias

SSRN Electronic Journal, 2017

We develop a model to study the political economy implications of information gatekeeping, i.e., ... more We develop a model to study the political economy implications of information gatekeeping, i.e., a policy of granting access only to friendly media outlets and denying access to critical ones. While an incumbent prefers positive bias, granting access improves her re-election probability only if coverage is sufficiently credible in the eyes of the public. Information gatekeeping can induce a quid pro quo relationship: media provides coverage with positive bias in exchange of future access, thereby affecting electoral outcomes in favor of incompetent incumbents. The degree of access media enjoy increases with competence of incumbents over those issues under public focus.

Research paper thumbnail of Choosing a Media Outlet When Seeking Public Approval

SSRN Electronic Journal, 2016

This paper considers the media outlet choice of a politician who seeks public approval for a poli... more This paper considers the media outlet choice of a politician who seeks public approval for a political agenda in a broadcast interview. The available media outlets differ in their ''toughness'' towards the politician. An interview with a tougher media outlet is more informative, but is also more likely to yield a negative outcome. The choice of the media outlet determines the accuracy of the information that flows to the public and the volume of citizens who consume that information. The analysis shows that (1) politicians who enjoy sufficient popularity are likely to avoid tough media outlets, (2) when seeking approval for controversial agendas, politicians are more likely to appear in tougher outlets.

Research paper thumbnail of Minority perception of exclusion and promotion hurdles

Economics Letters, 2016

h i g h l i g h t s • Minority perception of social exclusion can lead to promotion hurdle. • The... more h i g h l i g h t s • Minority perception of social exclusion can lead to promotion hurdle. • The principal can always elicit more effort from the majority candidate. • Minority candidate is only promoted if she has a sufficiently superior track record.

Research paper thumbnail of Secrecy versus Selective Disclosure in Sterilized Foreign Exchange Interventions

We study sterilized interventions and exchange rate targeting in a market microstructure framewor... more We study sterilized interventions and exchange rate targeting in a market microstructure framework. In a setting where a public disclo-sure of the central bank's target is not desirable for effective interven-tion, we show that selectively disclosing the target to another informed market participant, such as another central bank or a large currency trader, may result in better targeting relative to a regime of complete secrecy. In particular, if the market's uncertainty over the bank's tar-get is sufficiently high and if the central bank is leaning against the wind -attempting to move the exchange rate in the opposite direction of where the fundamental based trade takes it -selective disclosure is the preferred intervention regime.

Research paper thumbnail of Moral Hazard, Skin in the Game Regulation and Rating Quality

SSRN Electronic Journal, 2015

This paper investigates the implications of the "issuer skin in the game" regulation for the rati... more This paper investigates the implications of the "issuer skin in the game" regulation for the rating accuracy of a credit rating agency (CRA). An issuer solicits a rating from a CRA to sell a loan portfolio. The sale is subject to a retention requirement to mitigate a moral hazard problem. The CRA's optimal rating accuracy is shown to be increasing in the issuer's skin. The analysis relates the optimal retention rule to the CRA's information acquisition problem. The issuer's skin in the game and the CRA's rating accuracy are shown to be substitute mechanisms for eliciting effort from the issuer.

Research paper thumbnail of Statistical Discrimination and Moral Hazard

SSRN Electronic Journal, 2015

Research paper thumbnail of Costly Managerial Hedging, Market Liquidity and Firm Value

SSRN Electronic Journal, 2003

Empirical evidence suggests that managers hedge the systematic risk in their compensation by trad... more Empirical evidence suggests that managers hedge the systematic risk in their compensation by trading in the financial markets. This paper analyzes the implications of the manager's hedging ability on her optimal compensation scheme, incentives and firm value. We allow the manager to adjust her systematic risk exposure by trading the market portfolio. We find that (i) the manager's optimal hedge depends on the liquidity of the market. With imperfect liquidity, the manager's optimal hedge is not complete and she bears some systematic risk. (ii) The equilibrium pay-performance sensitivity is decreasing in the company's beta and increasing in the market liquidity. (iii) Since better hedging ability increases the manager's equilibrium incentives, the firm value increases in the liquidity of the market where systematic risk is traded. This last result contrasts with previous studies that suggest a negative relationship between stock market liquidity and production efficiency.

Research paper thumbnail of Hedge Markets for Executives and Corporate Agency

SSRN Electronic Journal, 2006

This paper analyzes the implications of executive hedge markets for firm value maximization in an... more This paper analyzes the implications of executive hedge markets for firm value maximization in an optimal contracting framework. The main results are as follows: Without any hedging ability, the manager underinvests in risk at the firm level to diversify his own compensation risk. If the manager can trade a security correlated with firm specific risk, the underinvestment in risk is reduced, optimal managerial share ownership and equilibrium effort increase. If the manager can hedge by simulating the sale of his shares, however, he can completely undo any incentive scheme. The model predicts that a higher degree of financial market development implies higher managerial share ownership and more efficient risk taking at the firm level.

Research paper thumbnail of Tariff Discrimination versus MFN under Incomplete Information

The Journal of International Trade & Economic Development, 2005

Does the presence of incomplete information affect a country's incentive to discrimi... more Does the presence of incomplete information affect a country's incentive to discriminate across exporters with different costs? If so, how? From a global perspective, does the presence of incomplete information weaken or strengthen the case for MFN? We examine these questions in a model of imperfect competition with two asymmetric exporters and a single importing country who is imperfectly informed about exporters' costs. Despite the lack of complete information, the importing country prefers discrimination to MFN. However, equilibrium tariff dispersion is lower under incomplete information. As a result, the global welfare gain from MFN, while still positive, is smaller under incomplete information relative to the case of complete information.

Research paper thumbnail of Bargaining and exclusivity in a borrower–lender relationship

Review of Economic Design, 2007

This paper presents a stylized model of a borrower-lender relationship where funds are gradually ... more This paper presents a stylized model of a borrower-lender relationship where funds are gradually invested in a project with uncertain return. We show that an exclusive financing relationship arises endogenously in equilibrium due to initial lender's superior information on the project's progress. The analysis also identifies a novel distortionary effect of exclusivity and the consequent loss of future rents on the ex-ante choices of the borrower. When she chooses the amount of funds to be initially invested in the project, the borrower chooses to overinvest making the future rent extraction by the initial lender as costly as possible.

Research paper thumbnail of Stock recommendation of an analyst who trades on own account

The RAND Journal of Economics, 2008

This article analyzes the provision of information acquisition and truthful reporting incentives ... more This article analyzes the provision of information acquisition and truthful reporting incentives to a financial analyst who can privately trade on own account. In a binary message and state space, I show that the analyst's reward scheme essentially provides him with a portfolio endowment traded in the market. Regardless of the true signal, the analyst issues the report that corresponds to the portfolio endowment with maximum market value, given security prices. The analyst's information acquisition incentive is driven only by private portfolio considerations: he acquires information only if he will be holding a large enough position in the stock he covers.

Research paper thumbnail of Risk sharing, risk shifting and the role of convertible debt

Journal of Mathematical Economics, 2008

This paper considers a financial contracting problem between a risk neutral entrepreneur and a ri... more This paper considers a financial contracting problem between a risk neutral entrepreneur and a risk averse investor. Once the venture is started, the entrepreneur chooses an action that determines the riskiness of the venture's payoff. When action choice is contractible, the optimal risk sharing consideration under limited liability calls for a pure debt contract and the low risk action is adopted. When the action choice is not contractible, due to the risk shifting problem implementing the low risk action requires a deviation from the optimal risk sharing. I focus on situations where despite this deviation, the risk averse investor prefers to implement the low risk action and show that a convertible debt contract is superior to pure debt, pure equity and any mixture of debt and equity.

Research paper thumbnail of Equilibrium Incentives to Acquire Precise Information in Delegated Portfolio Management

Journal of Financial Services Research, 2004

This paper investigates how a linear contract offered to a portfolio manager affects her incentiv... more This paper investigates how a linear contract offered to a portfolio manager affects her incentives to acquire precise information. I show that increasing the manager's portfolio share increases her demand for precise information. This result contrasts with the existing irrelevance results where the manager's portfolio share does not affect her precision choice. The irrelevance result relies on the manager facing a constant asset price, regardless of her demand. In a noisy rational expectations framework, increasing the manager's share decreases her demand and results in a less informative asset price. Thus, the manager gathers more precise information when offered a larger fraction of portfolio returns.

Research paper thumbnail of Media access, bias and public opinion

European Economic Review, Aug 1, 2022

Research paper thumbnail of Direct sale of information when precision is unobservable

Canadian Journal of Economics, May 1, 2004

This paper studies the incentives of an information seller to provide precise information when pr... more This paper studies the incentives of an information seller to provide precise information when precision is not observable and investors with rational expectations can extract information from the equilibrium asset price. I show that the seller can verify her precision by employing a non-linear contract. I derive the equilibrium fee for information as a function of the seller's incentives, the sales volume, and buyers' trading intensity. I also analyse the implications of allowing the seller to trade on her own account for truthfulness and precision choice. JEL Classification: G11, G14, D42 La vente directe d'information quand la pre´cision n'est pas observable. Ce me´moire e´tudie les incitations d'un vendeur d'information a`fournir de l'information pre´cise quand la pre´cision n'est pas observable et que des investisseurs qui ont des anticipations rationnelles peuvent extraire de l'information du prix d'e´quilibre d'un actif. L'auteur montre que le vendeur peut ve´rifier sa pre´cision a`l'aide d'un contrat non line´aire, et de´rive le prix d'e´quilibre pour l'information comme fonction des incitations du vendeur, du volume de ventes, et de l'intensite´de transactions des acheteurs. On analyse aussi les implications qu'entraıˆne la possibilite´pour le vendeur de transiger pour son propre compte sur le choix du degre´de pre´cision et de ve´rite´.

Research paper thumbnail of Media access, bias and public opinion

European Economic Review

I develop an electoral competition model in which an incumbent seeks to influence public opinion ... more I develop an electoral competition model in which an incumbent seeks to influence public opinion by strategically controlling the media's access to information. I show that the incumbent's optimal access strategy balances her demand for positive coverage with the public's demand for credible coverage. The media's access increases with the competence of politicians over issues under public focus. Controlling media's access can be instrumental in influencing public opinion, especially in the hands of popular incumbents. Persistence of key election issues, however, decreases the effectiveness of media access control by incumbents.

Research paper thumbnail of Direct sale of information when precision is

This paper studies the incentives of an information seller to provide precise information when pr... more This paper studies the incentives of an information seller to provide precise information when precision is not observable and investors with rational expectations can extract information from the equilibrium asset price. I show that the seller can verify her precision by employing a non-linear contract. I derive the equilibrium fee for information as a function of the seller's incentives, the sales volume, and buyers' trading intensity. I also analyse the implications of allowing the seller to trade on her own account for truthfulness and precision choice. JEL Classification: Gi1, G14, D42 La vente directe d'information quand la precision n'est pas observable. Ce mem- oire &tudie les incitations d'un vendeur d'information 'a fournir de l'information precise quand la precision n'est pas observable et que des investisseurs qui ont des anticipations rationnelles peuvent extraire de l'information du prix d'6quilibre d'un actif. L'aute...

Research paper thumbnail of Board Independence and Managerial Incentive Contracting

We present a model of CEO compensation where a board of directors which is not completely indepen... more We present a model of CEO compensation where a board of directors which is not completely independent from the CEO set CEO pay. We show that the board’s monitoring intensity and the equilibrium pay-performance sensitivity of CEO’s pay are increasing in the board’s independence from the CEO. JEL Classification: G30, G32

Research paper thumbnail of Moral hazard, skin in the game regulation and CRA performance

International Review of Economics & Finance, 2017

This paper investigates the implications of the "issuer skin in the game" regulation for the rati... more This paper investigates the implications of the "issuer skin in the game" regulation for the rating accuracy of a credit rating agency (CRA). The analysis shows that, as well mitigating a moral hazard problem on the issuer's side, skin in the game requirements can also improve the rating accuracy of a CRA involved in the sale. The results also link the accuracy of the CRA's ratings to the severity of the issuer's moral hazard problem. A more nuanced skin in the game rule that accounts for the specifics of the underlying security class can be more desirable rather than the proposed "one size fits all" rule.

Research paper thumbnail of Credit Attribution and Collaborative Work

SSRN Electronic Journal, 2019

We examine a dynamic model of teamwork in which the public attributes credit for success based on... more We examine a dynamic model of teamwork in which the public attributes credit for success based on its perception of individual efforts. The collaborative behavior varies starkly depending on the shape of marginal effort cost, or project's "difficulty." In the unique (interior) equilibrium, higher ability collaborators work less and thus receive lower credit and payoff for "easy" projects, while the reverse holds for "difficult" projects. Despite free-riding, the team equilibrium may involve over-investment. Social efficiency requires over-rewarding collaborative work and under-rewarding solo work. The incentives to team up and the impact of effort monitoring on credit attribution are also investigated.

Research paper thumbnail of Information Gatekeeping and Media Bias

SSRN Electronic Journal, 2017

We develop a model to study the political economy implications of information gatekeeping, i.e., ... more We develop a model to study the political economy implications of information gatekeeping, i.e., a policy of granting access only to friendly media outlets and denying access to critical ones. While an incumbent prefers positive bias, granting access improves her re-election probability only if coverage is sufficiently credible in the eyes of the public. Information gatekeeping can induce a quid pro quo relationship: media provides coverage with positive bias in exchange of future access, thereby affecting electoral outcomes in favor of incompetent incumbents. The degree of access media enjoy increases with competence of incumbents over those issues under public focus.

Research paper thumbnail of Choosing a Media Outlet When Seeking Public Approval

SSRN Electronic Journal, 2016

This paper considers the media outlet choice of a politician who seeks public approval for a poli... more This paper considers the media outlet choice of a politician who seeks public approval for a political agenda in a broadcast interview. The available media outlets differ in their ''toughness'' towards the politician. An interview with a tougher media outlet is more informative, but is also more likely to yield a negative outcome. The choice of the media outlet determines the accuracy of the information that flows to the public and the volume of citizens who consume that information. The analysis shows that (1) politicians who enjoy sufficient popularity are likely to avoid tough media outlets, (2) when seeking approval for controversial agendas, politicians are more likely to appear in tougher outlets.

Research paper thumbnail of Minority perception of exclusion and promotion hurdles

Economics Letters, 2016

h i g h l i g h t s • Minority perception of social exclusion can lead to promotion hurdle. • The... more h i g h l i g h t s • Minority perception of social exclusion can lead to promotion hurdle. • The principal can always elicit more effort from the majority candidate. • Minority candidate is only promoted if she has a sufficiently superior track record.

Research paper thumbnail of Secrecy versus Selective Disclosure in Sterilized Foreign Exchange Interventions

We study sterilized interventions and exchange rate targeting in a market microstructure framewor... more We study sterilized interventions and exchange rate targeting in a market microstructure framework. In a setting where a public disclo-sure of the central bank's target is not desirable for effective interven-tion, we show that selectively disclosing the target to another informed market participant, such as another central bank or a large currency trader, may result in better targeting relative to a regime of complete secrecy. In particular, if the market's uncertainty over the bank's tar-get is sufficiently high and if the central bank is leaning against the wind -attempting to move the exchange rate in the opposite direction of where the fundamental based trade takes it -selective disclosure is the preferred intervention regime.

Research paper thumbnail of Moral Hazard, Skin in the Game Regulation and Rating Quality

SSRN Electronic Journal, 2015

This paper investigates the implications of the "issuer skin in the game" regulation for the rati... more This paper investigates the implications of the "issuer skin in the game" regulation for the rating accuracy of a credit rating agency (CRA). An issuer solicits a rating from a CRA to sell a loan portfolio. The sale is subject to a retention requirement to mitigate a moral hazard problem. The CRA's optimal rating accuracy is shown to be increasing in the issuer's skin. The analysis relates the optimal retention rule to the CRA's information acquisition problem. The issuer's skin in the game and the CRA's rating accuracy are shown to be substitute mechanisms for eliciting effort from the issuer.

Research paper thumbnail of Statistical Discrimination and Moral Hazard

SSRN Electronic Journal, 2015

Research paper thumbnail of Costly Managerial Hedging, Market Liquidity and Firm Value

SSRN Electronic Journal, 2003

Empirical evidence suggests that managers hedge the systematic risk in their compensation by trad... more Empirical evidence suggests that managers hedge the systematic risk in their compensation by trading in the financial markets. This paper analyzes the implications of the manager's hedging ability on her optimal compensation scheme, incentives and firm value. We allow the manager to adjust her systematic risk exposure by trading the market portfolio. We find that (i) the manager's optimal hedge depends on the liquidity of the market. With imperfect liquidity, the manager's optimal hedge is not complete and she bears some systematic risk. (ii) The equilibrium pay-performance sensitivity is decreasing in the company's beta and increasing in the market liquidity. (iii) Since better hedging ability increases the manager's equilibrium incentives, the firm value increases in the liquidity of the market where systematic risk is traded. This last result contrasts with previous studies that suggest a negative relationship between stock market liquidity and production efficiency.

Research paper thumbnail of Hedge Markets for Executives and Corporate Agency

SSRN Electronic Journal, 2006

This paper analyzes the implications of executive hedge markets for firm value maximization in an... more This paper analyzes the implications of executive hedge markets for firm value maximization in an optimal contracting framework. The main results are as follows: Without any hedging ability, the manager underinvests in risk at the firm level to diversify his own compensation risk. If the manager can trade a security correlated with firm specific risk, the underinvestment in risk is reduced, optimal managerial share ownership and equilibrium effort increase. If the manager can hedge by simulating the sale of his shares, however, he can completely undo any incentive scheme. The model predicts that a higher degree of financial market development implies higher managerial share ownership and more efficient risk taking at the firm level.

Research paper thumbnail of Tariff Discrimination versus MFN under Incomplete Information

The Journal of International Trade & Economic Development, 2005

Does the presence of incomplete information affect a country's incentive to discrimi... more Does the presence of incomplete information affect a country's incentive to discriminate across exporters with different costs? If so, how? From a global perspective, does the presence of incomplete information weaken or strengthen the case for MFN? We examine these questions in a model of imperfect competition with two asymmetric exporters and a single importing country who is imperfectly informed about exporters' costs. Despite the lack of complete information, the importing country prefers discrimination to MFN. However, equilibrium tariff dispersion is lower under incomplete information. As a result, the global welfare gain from MFN, while still positive, is smaller under incomplete information relative to the case of complete information.

Research paper thumbnail of Bargaining and exclusivity in a borrower–lender relationship

Review of Economic Design, 2007

This paper presents a stylized model of a borrower-lender relationship where funds are gradually ... more This paper presents a stylized model of a borrower-lender relationship where funds are gradually invested in a project with uncertain return. We show that an exclusive financing relationship arises endogenously in equilibrium due to initial lender's superior information on the project's progress. The analysis also identifies a novel distortionary effect of exclusivity and the consequent loss of future rents on the ex-ante choices of the borrower. When she chooses the amount of funds to be initially invested in the project, the borrower chooses to overinvest making the future rent extraction by the initial lender as costly as possible.

Research paper thumbnail of Stock recommendation of an analyst who trades on own account

The RAND Journal of Economics, 2008

This article analyzes the provision of information acquisition and truthful reporting incentives ... more This article analyzes the provision of information acquisition and truthful reporting incentives to a financial analyst who can privately trade on own account. In a binary message and state space, I show that the analyst's reward scheme essentially provides him with a portfolio endowment traded in the market. Regardless of the true signal, the analyst issues the report that corresponds to the portfolio endowment with maximum market value, given security prices. The analyst's information acquisition incentive is driven only by private portfolio considerations: he acquires information only if he will be holding a large enough position in the stock he covers.

Research paper thumbnail of Risk sharing, risk shifting and the role of convertible debt

Journal of Mathematical Economics, 2008

This paper considers a financial contracting problem between a risk neutral entrepreneur and a ri... more This paper considers a financial contracting problem between a risk neutral entrepreneur and a risk averse investor. Once the venture is started, the entrepreneur chooses an action that determines the riskiness of the venture's payoff. When action choice is contractible, the optimal risk sharing consideration under limited liability calls for a pure debt contract and the low risk action is adopted. When the action choice is not contractible, due to the risk shifting problem implementing the low risk action requires a deviation from the optimal risk sharing. I focus on situations where despite this deviation, the risk averse investor prefers to implement the low risk action and show that a convertible debt contract is superior to pure debt, pure equity and any mixture of debt and equity.

Research paper thumbnail of Equilibrium Incentives to Acquire Precise Information in Delegated Portfolio Management

Journal of Financial Services Research, 2004

This paper investigates how a linear contract offered to a portfolio manager affects her incentiv... more This paper investigates how a linear contract offered to a portfolio manager affects her incentives to acquire precise information. I show that increasing the manager's portfolio share increases her demand for precise information. This result contrasts with the existing irrelevance results where the manager's portfolio share does not affect her precision choice. The irrelevance result relies on the manager facing a constant asset price, regardless of her demand. In a noisy rational expectations framework, increasing the manager's share decreases her demand and results in a less informative asset price. Thus, the manager gathers more precise information when offered a larger fraction of portfolio returns.