We take a mechanism design approach to dynamic capital allocation and risk-sharing between an investor (the principal) and asset managers (the agents).

Incentive-compatibility implies that managers with better idiosyncratic performance get larger fees, capital, and continuation utilities.

This generates an endogenous distribution of utilities across managers, which is a state variable of the optimal control problem of the principal.

With a continuum of agents, this gives rise to a Bellman equation in an infinite-dimensional space, which we solve with mean-field techniques.

With CRRA utilities, optimal compensation is proportional to assets-under-management and

costly exposure to idiosyncratic risk lowers risky investment.