A simple model of a money-management market with rational and extrapolative investors

Ran Spiegler*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

I analyze a simple model of competition in fees among mutual funds. The funds are vertically differentiated in terms of the expected return they can generate for investors. Following Berk and Green (2004), I assume that a fund's net return is decreasing in the amount of capital it manages, and that there is an infinite supply of capital by rational investors. Unlike the Berk-Green model, I assume there is also a finite supply of capital by non-rational investors who naively chase recent net returns. Investor behavior and the funds’ fee profile induce a long-run average amount of managed capital for each fund. I analyze Nash equilibrium in the game played by the funds, focusing on the implications of fund skill on fees, capital flows and net performance.

Original languageEnglish
Article number103488
JournalEuropean Economic Review
Volume127
DOIs
StatePublished - Aug 2020

Keywords

  • Behavioral industrial organization
  • Dumb money
  • Extrapolative expectations
  • Flow-performance relation
  • Mutual funds
  • Quacks
  • Smart money

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