Will Asset Managers Survive the Advent of Robots? An Optimal Contracting Approach

Abstract

In this paper, we study the adoption of automation technology in asset management. We build a principal-agent model in continuous time in which delegation of asset management to an agent is subject to moral hazard and will become automatable at an uncertain time. While the characteristics and the advent of the automation technology are exogenous and publicly observable, automation may not be as efficient as the agent. We derive an optimal long-term contract that adjusts the provision of incentives to the availability of such a technology so that automation impacts the agent since the contracting date. Our model suggests that the empirically observed layoffs that accompany the emergence of an automation technology may have a contractual foundation. Compared to the situation where automation is never feasible, we predict that (1) some poor performers are kept employed longer only to be instantaneously substituted at the technology advent, and (2) bonuses are front-loaded and then dropped once the technology becomes available.