Study on the Influence of Benchmark on the Design of Fund Incentive Contract Based on the Effort and Risk Choice of Manager

In this paper the ability of effort and risk choice of fund manager are considered simultaneously and both are related together by model settings. Under the case of observable effort and unobservable effort respectively, the influence of benchmark on the parameters selection of incentive contract is studied. The research discovers that under the case of observable effort of manager the benchmark has not any effect on the parameters of contract, but the contract based on benchmark can help investors to screen the ability of manager. Under the case of unobservable effort of manager, benchmark introduced into contract has the incentive effect. The paper indicates when the risk of benchmark increase, owing to the risk aversion the manager demands to enhance the sharing proportion of absolute return of fund and reduce the sharing proportion of relative return to benchmark, through which the risk-taking by manager decrease. The research proves that under the condition of asymmetric information benchmark introduced into contract also can help investors to understand the manager.