NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Efficiently Inefficient Markets for Assets and Asset Management

Nicolae B. Gârleanu, Lasse H. Pedersen

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.

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Document Object Identifier (DOI): 10.3386/w21563

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