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Is There Too Much Benchmarking in Asset Management?

Author

Listed:
  • Anil K Kashyap
  • Natalia Kovrijnykh
  • Jian Li
  • Anna Pavlova

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.

Suggested Citation

  • Anil K Kashyap & Natalia Kovrijnykh & Jian Li & Anna Pavlova, 2020. "Is There Too Much Benchmarking in Asset Management?," NBER Working Papers 28020, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28020
    Note: AP CF
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    Cited by:

    1. Kashyap, Anil K & Kovrijnykh, Natalia & Li, Jian & Pavlova, Anna, 2021. "The benchmark inclusion subsidy," Journal of Financial Economics, Elsevier, vol. 142(2), pages 756-774.
    2. Dimitri Vayanos & Paul Woolley, 2023. "Asset Management as Creator of Market Inefficiency," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 51(1), pages 1-11, March.
    3. Corum, Adrian Aycan & Malenko, Andrey & Malenko, Nadya, 2020. "Corporate Governance in the Presence of Active and Passive Delegated Investment," OSF Preprints 8n6xj, Center for Open Science.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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