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Rev Fin 2002; 15:987-1003
© 2002 the Society for Financial Studies

Incentive-Compatible Contracts for the Sale of Information

Bruno Biais
Toulouse University (IDEI-CRG-GREMAQ and IUF)

Laurent Germain
Ecole Supérieure de Commerce de Toulouse and SupAéro

Address correspondence to Bruno Biais, IDEI, Toulouse University, Place Anatole France, 31000 Toulouse, France, or e-mail: biais{at}cict.fr.

Abstract

An informed financial institution can trade on private information and also sell it to clients through a managed fund. To provide an incentive for the informed agent to trade in the interest of her client, the optimal contract requires that she be compensated as an increasing function of the profits of the fund. The optimal contract is also designed to limit the aggressiveness of the sum of the fund's trade and the proprietary trade. This reduces information revelation and thus leads to greater overall trading profits than if the informed agent only conducted proprietary trades.


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