Year-end Sale % OFF 
Abstract
We develop a principal-agent model based on a sequential game played by a representative investor and a fund manager in an asymmetric information framework. The model shows that investors’ perceptions of the fund market play the key role in the fund’s fee-setting mechanism. The managers’ true ability to deliver performance is not relevant. Along with a simple relation between fees and funds’ performance, empirical evidence suggests that most U.S. domestic equity mutual funds have added high markups in recent years. We show that, for these fees to be justified, investors would have expected the fund managers to be able to deliver an overall annual excess-return of around 3% over the S&P 500, net of fees, irrespective of the investment style and of the risk level of the funds. Therefore, we interpret these high markups as resulting from the investors’ optimism bias whose root can be found in their lack of financial literacy as well as in funds’ marketing effort.
Published Version
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
