
on Project, Program and Portfolio Management 
By:  Patrick Bolton; Christopher Harris 
Abstract:  We study a dynamiccontracting problem involving risk sharing between two parties — the Proposer and the Responder — who invest in a risky asset until an exogenous but random termination time. In any time period they must invest all their wealth in the risky asset, but they can share the underlying investment and termination risk. When the project ends they consume their final accumulated wealth. The Proposer and the Responder have constant relative risk aversion R and r respectively, with R>r>0. We show that the optimal contract has three components: a noncontingent flow payment, a share in investment risk and a termination payment. We derive approximations for the optimal share in investment risk and the optimal termination payment, and we use numerical simulations to show that these approximations offer a close fit to the exact rules. The approximations take the form of a myopic benchmark plus a dynamic correction. In the case of the approximation for the optimal share in investment risk, the myopic benchmark is simply the classical formula for optimal risk sharing. This benchmark is endogenous because it depends on the wealths of the two parties. The dynamic correction is driven by counterparty risk. If both parties are fairly risk tolerant, in the sense that 2>R>r, then the Proposer takes on more risk than she would under the myopic benchmark. If both parties are fairly risk averse, in the sense that R>r>2, then the Proposer takes on less risk than she would under the myopic benchmark. In the mixed case, in which R>2>r, the Proposer takes on more risk when the Responder's share in total wealth is low and less risk when the Responder's share in total wealth is high. In the case of the approximation for the optimal termination payment, the myopic benchmark is zero. The dynamic correction tells us, among other things, that: (i) if the asset has a high return then, following termination, the Responder compensates the Proposer for the loss of a valuable investment opportunity; and (ii) if the asset has a low return then, prior to termination, the Responder compensates the Proposer for the low returns obtained. Finally, we exploit our representation of the optimal contract to derive simple and easily interpretable sufficient conditions for the existence of an optimal contract. 
JEL:  D86 G22 
Date:  2010–06 
URL:  http://d.repec.org/n?u=RePEc:nbr:nberwo:16094&r=ppm 
By:  Carlo Alberto Magni 
Abstract:  The IRR problem. As widely known, the IRR has serious flaws: (i)multiple realvalued IRRs may arise, (ii) the meaning of each IRR may be ambiguous (rate of return or rate of cost?), (iii)complexvalued IRRs may arise, (iv) the IRR is, in general, incompatible with the net present value (NPV) in accept/reject decisions and the IRR ranking is, in general, different from the NPV ranking, (v)the IRR decision criterion is not applicable with variable costs of capital. Since the origins of the notions (Boulding 1935, 1936; Keynes 1936), the IRR drawbacks have stimulated an immense bulk of contributions over the decades investigating this issue and searching for some solution (see references in Gronchi 1987 and in Magni 2010a). We here present two autonomous solutions which solve the IRR problems completely by dismissing the traditional the IRR equation and considering a simple mean of period rates. As a pleasant byproduct, we find that accounting rates of return are meaningful economic rates of return, whereas the IRR is just a particular case of the mean of period rates. 
Date:  2010–06–15 
URL:  http://d.repec.org/n?u=RePEc:col:000162:007126&r=ppm 
By:  Ikuko Matsumoto 
Abstract:  The TheunHinboun Expansion Project â€“ a dam and diversion project under construction in Central Laos â€“ violates the Equator Principles and Lao law, according to this report. It documents how Lao villagers are being sold down the river in a hydro deal that will displace thousands of people from their homes and land, and deprive thousands more of access to fertile rice fields, riverbank vegetable gardens, grazing lands, forests and fisheries. The dam project undermines local communitiesâ€™ rights to access food. 
Keywords:  TheunHinboun, dam, central laos, equator, hydro deal, homes, vegetable, forests, rice fields, river bank, local communities, access food, historical record, environmental management, power company, transportation, water contamination, rice cultivation, villagers, villages, 
Date:  2010 
URL:  http://d.repec.org/n?u=RePEc:ess:wpaper:id:2577&r=ppm 
By:  Fabretti, Annalisa (University of Rome “Tor Vergata"); Herzel, Stefano (University of Rome “Tor Vergata") 
Abstract:  We consider the problem of how to set a compensation for a portfolio manager who is required to restrict the investment set, as it happens when applying socially responsible screening. This is a problem of Delegated Portfolio Management where the reduction of the investment opportunities to the subset of sustainable assets involves a loss in the expected earnings for the portfolio manager, compensated by the investor through an extra bonus on the realized return. Under simple assumptions on the investor, the manager and the market, we compute the optimal bonus as a function of the manager's risk aversion and his expertise, and of the impact of the portfolio restriction on the Mean Variance efficient frontier. We conclude by discussing the problem of selecting the best managers when his ability is not directly observable by the investor. 
Keywords:  Delegated portfolio management; Socially responsible investment; Incentives; Extrinsic incentives; Intrinsic motives 
Date:  2010–06–10 
URL:  http://d.repec.org/n?u=RePEc:hhb:sicgwp:2010_007&r=ppm 
By:  Konrad Stahl (University of Mannheim); Roland Strausz (HumboldtUniversity at Berlin) 
Abstract:  Who does, and who should initiate costly certification by a third party under asymmetric quality information, the buyer or the seller? Our answer  the seller  follows from a nontrivial analysis revealing a clear intuition. Buyerinduced certification acts as an inspection device, whence sellerinduced certification acts as a signalling device. Sellerinduced certification maximizes the certifier's profit and social welfare. This suggests the general principle that certification is, and should be induced by the better informed party. The results are reflected in a case study from the automotive industry, but apply also to other markets  in particular the financial market. 
Date:  2010–06 
URL:  http://d.repec.org/n?u=RePEc:trf:wpaper:323&r=ppm 