Efficiently Inefficient Markets for Assets and Asset Management

NBER Working Paper No. 21563

Issued in September 2015

NBER Program(s):Asset Pricing



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." Finally, we show why large investors should be active and discuss broader implications and welfare considerations.

Acknowledgments and Disclosures

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Document Object Identifier (DOI): 10.3386/w21563

Published: NICOLAE GÂRLEANU & LASSE HEJE PEDERSEN, 2018. "Efficiently Inefficient Markets for Assets and Asset Management," The Journal of Finance, vol 73(4), pages 1663-1712.

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