Working Paper: CEPR ID: DP12664
Authors: Nicolae Bogdan Garleanu; Lasse Heje Pedersen
Abstract: We consider a model where investors can invest directly or search for an asset manager, information about assets is costly, and managers charge an endogenous fee. The efficiency of asset prices is linked to the efficiency of the asset management market: if investors can find managers more easily, more money is allocated to active management, fees are lower, and asset prices are more efficient. Informed managers outperform after fees, uninformed managers underperform after fees, and the net performance of the average manager depends on the number of "noise allocators." Small investors should be passive, but large and sophisticated investors benefit from searching for informed active managers since their search cost is low relative to capital. Hence, managers with larger and more sophisticated investors are expected to outperform.
Keywords: Asset Management; Investment; Information Search; Efficiency; Asset Pricing; Liquidity
JEL Codes: G1; G11; G12; G14; G2; G23; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Ease of finding managers (M54) | More money allocated to active management (G11) |
| More money allocated to active management (G11) | Lower fees (G19) |
| Lower fees (G19) | More efficient asset prices (G19) |
| Reduced search costs (D83) | Increased efficiency in asset pricing (G19) |
| Type of manager (informed vs. uninformed) (D83) | Performance outcomes post-fees (L25) |
| Number of noise allocators (D79) | Net performance of average manager (D29) |
| Investor's size and sophistication level (G11) | Investment strategy and outcomes (G11) |
| Type of investors (G24) | Performance of asset managers (G11) |