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Efficiently Inefficient Markets for Assets and Asset Management

Nicolae Bogdan Garleanu and Lasse Heje Pedersen

No 12664, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We consider a model where investors can invest directly or search for an asset manager, information about assets is costly, and managers charge an endogenous fee. The efficiency of asset prices is linked to the efficiency of the asset management market: if investors can find managers more easily, more money is allocated to active management, fees are lower, and asset prices are more efficient. Informed managers outperform after fees, uninformed managers underperform after fees, and the net performance of the average manager depends on the number of "noise allocators." Small investors should be passive, but large and sophisticated investors benefit from searching for informed active managers since their search cost is low relative to capital. Hence, managers with larger and more sophisticated investors are expected to outperform.

Keywords: asset management; Asset Pricing; efficiency; Information; investment; liquidity; search (search for similar items in EconPapers)
JEL-codes: G1 G11 G12 G14 G2 G23 G24 (search for similar items in EconPapers)
Date: 2018-01
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