Do search costs explain persistent investment in active mutual funds?

Aljoscha Janssen and Jurre Thiel

Journal of Economic Dynamics and Control, 2025, vol. 176, issue C

Abstract: Active funds, though losing market share since the 1990s, make up nearly half of all mutual funds but charge more without better performance. We analyze fund data and a search model, highlighting the impact of search costs and active fund preferences. From 1993 to 2018, reduced search costs expanded the market and heightened competition, while a preference shift from active to passive funds increased the latter's market share. However, investors who choose active funds, facing higher search costs, and continue to show a strong preference for them, allow these funds to keep charging higher fees.

Keywords: Mutual funds; Search costs; BLP (search for similar items in EconPapers)
JEL-codes: D12 D22 G15 L13 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:176:y:2025:i:c:s016518892500065x

DOI: 10.1016/j.jedc.2025.105099

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