Working Paper: NBER ID: w21563
Authors: Nicolae B. Garleanu; Lasse H. 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." Finally, we show why large investors should be active and discuss broader implications and welfare considerations.
Keywords: asset management; market efficiency; search frictions; information costs
JEL Codes: D4; D53; D83; G02; G12; G14; G23; L10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| manager information status (M15) | performance outcomes (L25) |
| number of noise allocators (D79) | performance of the average manager (L25) |
| search costs (D23) | allocation to active management (G11) |
| search costs (D23) | market efficiency (G14) |
| search costs (D23) | asset price efficiency (G14) |
| asset complexity (G32) | managerial fees (M12) |
| asset complexity (G32) | pricing efficiency (D61) |
| investor sophistication and search costs (G24) | choice between active and passive management (E63) |
| search costs over time (G14) | market efficiency (G14) |