In this paper, we use a theoretical model, the Linear Approximated Almost Ideal Demand System (LA/AIDS), to reexamine the sensitivities of category equity funds with different risk-return profiles and the incentives offered to equity fund managers in Taiwan. By applying the Generalized Maximization Entropy (GME) method, expenditure elasticities indicate that an increase in expenditure have positive impacts on asset allocation, substitution elasticities show that Technology, Value and Special equity funds appear as complementary categories; moreover, General and Special equity funds appear as substitutes but serve as complements for M&S and OTC equity funds, own-price elasticities are all negative while the sign of cross-price elasticities are mixed. We also find that Technology, Value, Special and OTC equity fund managers have positive incentives to optimize their performances which help to explain the adoption of asset based schemes. However, managers of M&S and General equity fund managers have no incentives to optimize their performance under asset based scheme, thus we suggest the authorities to adopt the price based scheme.
