managers and convex compensation contracts. We show that convex incentives lead to significant equilibrium mispricing, but … strong or too weak and hurt investors as a whole. For example, investors' utility may be decreasing in the average managers …

We propose a model where investors hire fund managers to invest either in risky bonds or in riskless assets. Some … managers have superior information on the default probability. Looking at the past performance, investors update beliefs on … their managers and make firing decisions. This leads to career concerns which affect investment decisions, generating a …