Understanding Responsibility in Financial Management: The Role of Fee Structures

The principal-agent problem is prevalent in the financial management industry, where financial agents are responsible for managing their clients' payoffs. Although extensive literature examines the risk-taking behavior of agents when making decisions for others, the results remain mixed. We conduct laboratory experiments that investigate situations where agents make decisions for themselves and for others under two incentive structures: fixed incentives, in which agents are responsible only for others' payoffs and welfare, and variable incentives, where agents’ payments align with their principals. Our findings show that agents are most efficient when making decisions for themselves. The performance-based scheme proves to be more efficient for both parties than the fixed incentive scheme. Agents are more likely to trade and engage in risky behaviors, such as speculative trading, under the fixed incentive treatment. Bubble formation is significantly smaller in principal-agent scenarios where agents have sole responsibility under the fixed treatment. Women tend to show greater concern for the welfare of others, even when their own payoff is fixed. Cognitive ability, psychopathy, and the big five personality traits also play significant roles in trading behavior and wealth generation, although these relationships depend on specific environmental conditions.