Article ID Journal Published Year Pages File Type
7359312 Journal of Economic Theory 2018 52 Pages PDF
Abstract
We present a model in which asset managers design their contracts to attract flows of investor capital. We find that they make their contracts depend on public information, e.g. credit ratings or benchmark indices, as a way to attract flows, rather than as a way to mitigate incentive problems, as has been emphasized in the literature. Unfortunately, asset managers' competition for flows triggers a race to the bottom: asset managers use public information in their contracts even though it is socially inefficient. This inefficiency arises because contracting on public information prevents risk sharing.
Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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