This study analyzes whether the current performance evaluation and compensation systems for alternative investment businesses in NPS funds are optimally designed to resolve incentive problems. The majority of alternative investment tasks are delegated to private equity funds (PEF), which have expertise in management and asset valuation of alternative investment assets. However, this expertise also gives rise to an inefficient transmission of information on the value of invested assets privately known to PEFs. Specifically, PEFs may have a distorted incentive to overestimate the value of invested assets to convince the NPS fund not to withdraw their funding until the investment has fully matured. On the contrary, PEFs also bear the cost of false reporting: they may be penalized by the regulatory authorities for any violations of good faith duties.

Combining moral hazard with strategic communication with lying costs, we find that PEFs’ incentive to misreport the valuation results is closely related to bonus pays that are contingent on the high return of invested assets. Specifically, the incentive to misreport is low if and only if the bonus pay is either very low or very high. We also find that the incentive to misreport grows stronger if the NPS fund rewards its employees based on the mid-term valuation of invested assets, suggesting that the mid-term performance evaluation with the NPS funds should be reconsidered. Lastly, we find that the optimal compensation system to resolve the incentive misalignment problems should contain a sufficiently large base upfront pay.

Preface
Executive Summary

Chapter 1 Introduction

Chapter 2 Review of NPS Alternative Investment Operations and Necessity of Research
　Section 1 Review of NPS Fund Alternative Investment Management and Evaluation System
　Section 2 Review of Delegated Management System for Alternative Investments
　Section 3 Improvement to the Current Alternative Investment System

Chapter 3 Theoretical Analysis and Policy Implications
　Section 1 Model
　Section 2 Relationship Between the Current Alternative Investment System and Theoretical Model
　Section 3 Partial Equilibrium Analysis: Decision on Investment Period Extension
　Section 4 Impact of Alternative Investment Performance Evaluation on Efficient Information Transmission
　Section 5 General Equilibrium Analysis and Design of an Optimal Performance Compensation System

Chapter 4 Conclusion

References
ABSTRACT