Is There Too Much Benchmarking in Asset Management?

Anil Kashyap, Natalia Kovrijnykh (), Jian Li and Anna Pavlova

No 28020, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D82 D86 G11 G12 G23 (search for similar items in EconPapers)
Date: 2020-10
Note: AP CF
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Citations: View citations in EconPapers (5)

Forthcoming in the American Economic Review
Published as Anil K Kashyap & Natalia Kovrijnykh & Jian Li & Anna Pavlova, 2023. "Is There Too Much Benchmarking in Asset Management?," American Economic Review, vol 113(4), pages 1112-1141.

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Journal Article: Is There Too Much Benchmarking in Asset Management? (2023)
Working Paper: Is There Too Much Benchmarking in Asset Management? (2021)
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