Trustee’s Level Of Effort, Total Welfare And Caution Duty In Fiduciary Relationship

Information asymmetry and nondeteminacy result in trust contract’s fail to achieve effective agreement based on level of effort. The trustee couldnot be effectively penalized according to the sole trust contract because of the diverstiy of trust affairs. The optimal risk sharing and the optimal incentives are in contradiction when trust contracts are solely depended on, and the proceeds sharing contracts are also hard to achieve the satified incentives utility. Therefore, caution duty is required to incentivize the trustee. In the circumstances of informaiton asymmetry and nondeterminacy, caution duty could, to some degree, find inexertion of the trustee and make penalty as well as prevent inexertion of the trustee to improve excitation effect. However, at present, caution duty is specifically stipulated in some certain areas. It lacks a overall summary. Trust law in various countries mostly adopts broad formulation when it remarks caution duty. In order to unify standards on caution duty, this dissertation focuses on the following two issues:(1) without caution duty, how much effort would the trustee make and what are the results;(2) how much effort should caution duty require the trustee to make and what are the results. Through answering these two questions, the dissertation will propose construction standards and principles on caution duty. Through a turst agent model of the trustee holding full bargaining power and risk partiality, the dissertation analysizes and compares the trustee’s level of effort and total welfare within different cases----the case with caution duty, the case without caution duty as well as cases with caution duty of different standards.The significances of this research are:(1) It provides theoratically caution duty with integrated analytical methods to build up a relatively complete analytical framework as well as to develop conveniently other new analytical framework when it is required.(2) It provides the standards of caution duty with integrated and general guiding principles and the specific formulation of caution duty with scientific basis.(3) Through comparisons with different cases, i.e. cases with and without caution duty, cases with different standards of caution duty, it finds out a incentives mode which is most beneficial to total welfare so as to improve it.(4) Although the pre-assumptions in this dissertation donot fit entirely into the real trust market, as qualitative analysis, it reminds us to attach importance to trust parties’ bargaining power and risk particality and offers reference for the law building of trust market supervision and proceeds promising.Adopting the Principal-Agent model as its main research method, this dissertation makes the trustor and the trustee hold respectively all bargaining power and have them have different risk particality. This dissertation will firstly set a model of the trustor holding full bargaining power, trustor keeping risk-neutral and trustee risk aversion, then trustee’s level of effort, total welfare and caution duty are studied; trustor and trustee risk partiality remaining the same as it in the model, the trustee is set to hold full bargaining power, then trustee’s level of effort, total welfare and caution duty are studied; having the assumption of the trustee holding full bargaining power unchanged, making changes on trustor and trustee risk partiality of the trustor risk aversion and the trustee risk neutral, then trustee’s level of effort, total welfare and caution duty are studied. The incentives mode of the Principal-Agent model in this dissertation is composed of two modes----mode with caution duty and mode without caution duty. In the mode without caution duty, gain sharing contract is solely used to incentivize while in the mode with caution duty, caution duty and the contract are both used to incentivize. The mode with caution duty is composed of two situations with different standards----the standard of net proceeds and the standard of total welfare. For the former, maximization of proceeds is used as its policy to formulate caution duty standards while for the latter the formulation policy is maximization of total welfare.This dissertation consists of six chapters. Chapter I first proposes research issues, research ideas and research significances; then it explains the general concepts involved; lastly it illustrates the research methods of this dissertation. Chapter II generally views the pertinent literature involving Principal-Agent mode, Principal-Agent theory on feduciary relationship, definitions on caution duty standard, agent’s bargaining power as well as partial content of behavioral economics. ChapterⅢanalysizes the rudiments of caution duty; it studies the trustee’s level of effort and total welfare as well as caution duty within the framework of the trustor holding full bargaining power and risk neutral and the trustee risk aversion; it analysizes and compares incentives range and total welfare in varied incentives modes; it also analysizes the required effective sanction levels when caution duty is executed and compares perfect recourse, reciprocal policy and perfect indemnity. ChapterⅣ first sets up a general analytical framework that the trustee holds full bargaining power, the trustor remains risk neutral and the agent remains risk aversion; then through figures it illustrates the features of equilibrium point and analysizes the total welfare in this mode, the trustee’s level of effort, total welfare as well as caution duty in investment trust products are studied by using this framework. Under this framework, in terms of incentives range and total welfare, not only the mode with caution duty differs from the mode without caution duty but differences also exist in the two caution duty standards. Chapter V studies the trustee’s level of effort, total welfare and caution duty under the framework that the trustee holds full bargaining power, the trustor remains risk aversion and the agent remains risk neutral. The trustee taking unlimited liability could make the optimal incentives correspond to the optimal risks allocation so as to automatically realize the maximization of total welfare; this couldnot be reached while the trustee taking limited liability, moreover, the function of caution duty is restricted. This framework is for financing trust products and to analyze the regulations of trust companies promising proceeds. ChapterVI makes a conclusion and comparison of the mode without caution duty and the level of effort, total welfare of the two caution duty standards. It also generalizes the innovative points of this dissertation and proposes its extensions. The main conclusions of this dissertation are as follows:although under the condition of information asymmetry and nondeteminacy both the mode without caution duty and the mode with caution duty could stimulate the trustee to make efforts, the former has limitations and there is a need for the latter; as the trustor and the trustee differ in terms of bargaining power, risk partiality and incentives mode, the trustee’s level of effort and total welfare are different.(1) Within the framework of the trustor holding bargaining predominance, the trustor remaining risk neutral and the trustee risk aversion and in the mode without caution duty, the trustee undertakes some risks and the trustor has to pay for risk premium, so the total welfare cannot be maximized; in the mode with caution duty, the trustee bears no risk and the trustor has no need to pay for risk premium, compared with the mode without caution duty, this mode could incentivize efforts in a wider range, which facilitate total welfare increase; caution duty’s net proceeds standard equals to welfare standard.(2) The framework of the trustee holding bargaining predominance, the trustor remaing risk neutral and the trustee risk aversion is suitable for studying the trustor’s level of effort, total welfare and caution duty in investment trust products, and within this framework, caution duty’s welfare standard incentive range is broader than that of net proceeds standard and that of the mode without caution duty, the total welfare under the caution duty welfare standard is higher than that under net proceeds standard and under the mode without caution duty.(3) The framework of the trustee holding bargaining predominance, the trustor remaining risk aversion and the trustee risk neutral is suitable for financing trust products study, in this framework, it is allowed to promise that proceeds could make the optimal incentives equated with the optimal risk sharing, then the total welfare could be realized automatically, meanwhile it could meet the requirement of the standard of caution duty net proceeds and the standard of welfare. Comparatively speaking, limiting promising proceeds departs the optimal incentives and the optimal risk sharing, thus the maximization of total welfare could not be realized automatically. Caution duty could, to some extent, increase total welfare when the proceeds promising is limited, however, it is still lower than the total welfare under unlimited liability.This dissertation states that the structure of caution duty should be on the basis of the following principles:(1) In terms of total welfare, the mode with caution duty is no inferior to the mode without caution duty, thus it needs to set caution duty for the trustee.(2) The level of effort or incentive effort range required by caution duty welfare standard is no less than those required by the mode without caution duty and is no less than those required by net proceeds standard.(3) If the part who holds full bargaining power is risk neutral and is of no limited liability restrictions, then caution duty welfare standard equals to net proceeds standard and the calculation of welfare standard can be replaced by the calculation of net proceeds standard.(4) If the part who holds full bargaining power remains risk aversion or is of limited liability restrictions, then caution duty welfare standard differs from net proceeds standard, in terms of total welfare, the standard of duy of care welfare is no inferior to that of net proceeds. Although the concrete form of the trustor and the trustee’s utility function cannot be found out, it should be given full consideration of both parties’bargaining power and risk partiality while caution duty is set up.(5) If the trustee holds full bargaining power and remains risk neutral, it should, as far as possible, lessen the total welfare reduce which limited liability restrictions bring.This dissertation makes important innovative achievements in the aspects of caution duty analysis, Principal-Agent model exploration and trust products study:(1) It sets up analysis systems of the mode without caution duty and the mode with caution duty, proposes taking welfare maximization as its goal while structuring caution duty standard, and provides an idea of emphasizing trust parties’bargaining power and risk partiality.(2) It adjusts Laffont (2002) moral hazard model and applies it to the situation of the trustee holding full bargaining power and this applies not only to feduciary relationship study but also to studies on other Principal-Agent relations which have the same bargaining power and risk partiality features.(3) It asserts that, as for investment trust products, it is of great importance to set up caution duty according to welfare standard of caution duty, and the supervision department should, on the basis of maintaining necessary inspection frequency and inspection quality, supervise trust companies through putting more efforts in penalty; as for financing trust products, not only caution duty but also the effect made by limited liability should be taken into account. Regulations on prohibiting trust companies to promise proceeds should be amended and trust companies should be given freedom to choose whether promise proceeds or not.