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When cheaper is better: fee determination in the market for equity mutual funds
[journal article]
Abstract In this paper, we develop a model of the market for equity mutual funds that captures three key characteristics of this market. First, there is competition among funds. Second, fund managers’ ability is not observed by investors before making their investment decisions. Third, some investors do not ... view more
In this paper, we develop a model of the market for equity mutual funds that captures three key characteristics of this market. First, there is competition among funds. Second, fund managers’ ability is not observed by investors before making their investment decisions. Third, some investors do not make optimal use of all available information. The main results of the paper are that (1) price competition is compatible with positive mark-ups in equilibrium, and (2) worse-performing funds set fees that are greater or equal to those set by better-performing funds. These predictions are supported by available empirical evidence.... view less
Classification
National Economy
Methods and Techniques of Data Collection and Data Analysis, Statistical Methods, Computer Methods
Method
empirical
Free Keywords
Mutual fund fees; Mutual fund performance; Product quality; Asymmetric information; Bounded rationality
Document language
English
Publication Year
2008
Page/Pages
p. 871-885
Journal
Journal of Economic Behavior & Organization, 67 (2008) 3-4
DOI
https://doi.org/10.1016/j.jebo.2007.04.003
Status
Postprint; peer reviewed
Licence
PEER Licence Agreement (applicable only to documents from PEER project)