Working Paper: NBER ID: w28020
Authors: Anil K. Kashyap; Natalia Kovrijnykh; Jian Li; Anna Pavlova
Abstract: We propose a tractable model of asset management in which benchmarking arises endogenously, and analyze its unintended welfare consequences. Fund managers’ portfolios are not contractible and they incur private costs in running them. Incentive contracts for fund managers create a pecuniary externality through their effect on asset prices. Benchmarking inflates asset prices and creates crowded trades. The crowding reduces the effectiveness of benchmarking in incentive contracts for others, which fund investors fail to account for. A social planner, recognizing the crowding, opts for contracts with less benchmarking and less incentive provision. The planner also delivers lower asset management costs.
Keywords: benchmarking; asset management; incentive contracts; social planner; welfare implications
JEL Codes: D82; D86; G11; G12; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| benchmarking (C52) | asset prices (G19) |
| benchmarking (C52) | expected returns (G17) |
| benchmarking (C52) | effectiveness of contracts for other investors (G39) |
| constrained social planner (D10) | contracts with less benchmarking (L14) |
| contracts with less benchmarking (L14) | lower asset management costs (G19) |