Working Paper: CEPR ID: DP13127
Authors: Julien Hugonnier; Jaksa Cvitanic
Abstract: We study the optimal design of a menu of funds by a manager who is required to use linear pricing and does not observe the beliefs of investors regarding one of the risky assets. The optimal menu involves bundling of assets and can be explicitly constructed from the solution to a calculus of variations problem that optimizes over the indirect utility that each type of investor receives. We provide a complete characterization of the optimal menu and show that the need to maintain incentive compatibility leads the manager to offer funds that are inefficiently tilted towards the asset that is not subject to the information friction.
Keywords: mutual fund menus; screening; linear pricing; asset bundling
JEL Codes: C62; C71; D42; D82; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| linear pricing (D41) | bundling of assets (G32) |
| bundling of assets (G32) | inefficiencies in fund offerings (G23) |
| linear pricing (D41) | investor utility (G11) |
| optimal fund menu (G11) | total fees maximization (L21) |
| linear pricing (D41) | Pareto improvement in investor welfare (D69) |