Delegation Chains

Delegation Chains

Amil Dasgupta, Ernst Maug

Series number :

Serial Number: 
798/2021

Date posted :

November 04 2021

Last revised :

June 26 2023
SSRN Share

Keywords

  • Career Concerns • 
  • delegated portfolio management • 
  • money management • 
  • Pension funds • 
  • mutual funds

We ask why we observe multiple layers of decision-making in fund management with investors, sponsors, fund managers, and consultants, even if additional decision-makers are costly and do not contribute to superior performance. In our model, an investor hires a wealth manager (“sponsor”), who can delegate asset allocation decisions to a fund manager with investing abilities inferior to her own.

Delegation results in lower performance but may be chosen because it reduces the sponsor’s reputational risk: Sub-delegating decisions creates an additional decision-maker who garbles inferences about the sponsor's ability. We characterize when excessive delegation arises and the properties of delegation chains.

Authors