Stephen P. King

On relative performance contracts and fund manager's incentives

Abstract For pension schemes, mutual funds, banks and other financial intermediaries, large portfolio decisions are increasingly delegated to fund managers. Recently, there has been growing concern that these managers seem to adopt extremely similar investment strategies. One possible explanation for this phenomenon may be found in reward schemes based on relative performance. We show how relative performance reward schemes may arise as optimal contracts. Our focus is the fund owners–fund manager relationship in which the manager, before making a portfolio decision on behalf of the owners, may acquire, at some cost, information that is not available to the owners. Payment schemes based on relative performance afford the owners tighter control of their managers activities. However, if two managers of different funds both accept contracts that depend on their relative as well as absolute performances, then there may exist equilibria in the managers subgame that result in undesirable outcomes for the owners.

Myopic Corporate Behaviour with Optimal Management Incentives

Existing models in which stock markets lead to corporate short-termism rely on an exogenously imposed objective for top managers. This paper endogenizes both managers concern for short-term stock prices and the resulting distortions. The authors show that, when the manager can trade on her own account on the stock market in a way that is observable to market participants but which is not verifiable in court, shareholders will choose an incentive contract that induces a bias towards short-term returns. Consistent with recent evidence, the short-term bias is greater when the optimal contract provides low-powered management incentives. Copyright 1999 by Blackwell Publishing Ltd

Access Pricing under Rate-of-Return Regulation

Third-party access to major infrastructure facilities is a key component of National Competition Policy. In many situations, both through states regimes and access undertakings under the new part IIIA of the Trade Practices Act, access will be governed by explicit or implicit rate-of-return procedures. Infrastructure assets will be valued and translated into an allowable return for the owners.

Oligopoly and overtime

Abstract Overtime pay is an important labor cost in many industries. However, the theoretical analysis of overtime pay has hitherto been carried out in a single firm framework. In this paper we present a simple oligopoly model to investigate the role of overtime pay on firm behavior. When firm interactions are taken into account, an increase in the marginal wage due to overtime provisions may limit competition and reduce industry output. This, in turn, affects not only industry employment but, depending on the exact nature of demand and production technology, may raise firm profits. Firms, however, may be unable to coordinate on mutually advantageous overtime pay without government or union intervention. Industry-wide unions may introduce and enforce overtime, and also use the wage schedule to seize the rents generated by overtime pay. We consider the overtime laws of Australia and the US and show how they can act to moderate competition. In contrast to standard single firm analysis, we show that overtime laws will generally affect firm output and employment behavior and may raise profits even when the straight-time wage is flexible.

Talking down the firm: Short-term market manipulation and optimal management compensation

This paper analyzes the optimal use of short and long-term share prices in management incentive contracts. A key innovation of our model is that the short-term share price is determined even before the manager has made her effort choice and therefore cannot be informative in the standard principl-agent sense.