The International Active Fund Management Industry: Concentration Cross Effects

Abstract

We introduce an international active fund management industry model, in which competing managers, each having heterogeneous incentives (effort productivities, costs), search for domestic versus foreign investment opportunities. In equilibrium, incentive heterogeneity leads to a novel prediction: increasing foreign competitiveness, which improves (worsens) domestic manager incentives, induces an increase (decrease) of both domestic performance and size. Empirically, we find that 30 global markets’ performance and size, on average, decrease with U.S. concentration. This evidence is consistent with our theoretical predictions but is inconsistent with extrapolation of single-country (implying homogeneous incentives) equilibria to one “global village” [e.g., Feldman, Saxena, and Xu (2020)].