Is There Too Much Benchmarking in Asset Management?
Anil K Kashyap, Natalia Kovrijnykh, Jian Li, Anna Pavlova
American Economic Review · 2023 · Volume 113 · Issue 4
Abstract
We propose a tractable model of asset management in which benchmarking arises endogenously, and analyze its 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
Asymmetric and Private Information, Mechanism Design, Economics of Contract: Theory, Portfolio Choice, Investment Decisions, Asset Pricing, Trading Volume, Bond Interest Rates, Pension Funds, Non-bank Financial Institutions, Financial Instruments, Institutional Investors, Behavioral Finance: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets [Neurofinance]
Enable JavaScript for citation tools and additional paper interactions.