Is There Too Much Benchmarking in Asset Management?

Anil K Kashyap, Jian Li, Natalia Kovrijnykh and Anna Pavlova

No 16296, CEPR Discussion Papers from Centre for Economic Policy Research

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: Incentive contracts; Moral hazard; Relative performance; Pecuniary externality; Asset management; Benchmark; Index; Welfare (search for similar items in EconPapers)
JEL-codes: D82 D86 G11 G12 G23 (search for similar items in EconPapers)
Date: 2021-06
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Related works:
Journal Article: Is There Too Much Benchmarking in Asset Management? (2023)
Working Paper: Is There Too Much Benchmarking in Asset Management? (2020)
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