Incentive schemes in the financial industry. An experimental approach

The most recent financial crisis highlighted several fragilities of financial markets. According to several observers, a relevant source of instability could be identified in the incentive schemes of the financial professionals. Yet, it is not clear whether the higher risk is due to the structure of the incentive scheme in itself or whether it emerges as strategic pricing by asset managers in order to deal with a more generalized market competition. In the light of the ongoing debate on the role of the incentive schemes in the financial industry, the main goal of this thesis is to emphasize that market interventions should be implemented by involving in the decision-making process both investors and managers and not only the latter. In this Doctoral thesis, to disentangle and control some possible effects deriving from the delegated portfolio management context, the experimental methodology is implemented. Managers and investors are allowed to interact: we investigate to what extent this interaction affect general results. In Chapter 1 of this Doctoral Thesis the context and the related literature will be provided with a focus on the ongoing debates and on the answers provided by the experimental literature. In Chapter 2 we manipulate the contract design by allowing investors under endowment legitimacy (or not) to decide the incentive scheme while managers have no bargaining power. In Chapter 3 instead, we investigate to what extent a market setting characterized by competition between managers and disclosure of others’ practices affect the market fees’ combination. Differently than in the experiment in Chapter 2, here both players are involved in the decision-making process: managers are asked to propose fees combinations while investors choose the fee combination they want to pay.