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American Economic Review Vol. 113 No. 4 2023

Is There Too Much Benchmarking in Asset Management?

Anil Kashyap1; Natalia Kovrijnykh2; Jian Li3; Anna Pavlova4

1 Booth School of Business, University of Chicago, National Bureau of Economic Research, and Centre for Economic Policy Research (email: ) · 2 W.P. Carey School of Business, Arizona State University (email: ) · 3 Columbia Business School (email: ) · 4 London Business School and Centre for Economic Policy Research (email: )

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.

DOI
10.1257/aer.20210476
Volume
113
Issue
4
Pages
1112-1141
Language
en
Sources
openalex bibtex:phds-export.bib crossref

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