Contract design of private equity funds with a quadratic utility function
NI Xuanming1, ZHANG Junchao1, ZHAO Huimin2, SHEN Jiayu1, OU Mingqing3
1. School of Software and Microelectronics, Peking University, Beijing 100871, China; 2. Business School, Sun Yat-sen University, Guangzhou 510275, China; 3. CSSC Systems Engineering Research Institute, Beijing 100094, China
Abstract：As the main organization type of the private equity funds, limited partnership has many advantages including exemption from double taxation, high incentive, efficiency in decision-making, but the basic difference between it and the company in the mechanism design has not been fully explained. This study explores the optimal contract design by using a quadratic utility function, which does not conform to the assumption of factor separability, to capture the risk aversion characteristics of the general partner in the game theory framework and also compares the results with them under the company mechanism. The findings are that the fixed management fee has negative incentive effect, which induces when the extremely outstanding managers obtain designing contract right under limited partnership, they obtain higher management fee and lower profit ratio, and the social welfare is lower than that under company mechanism. Under ordinary circumstances, the optimal contracts and welfare under two mechanism are different and no one is absolutely better than the other mechanism.
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2020, Vol. 40 
