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Information Asymmetry and the Mutual Fund Market

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  • Lemeunier, Sébastien Michel

Abstract

The literature is still divided about the information asymmetry problems of actively managed mutual funds. This disagreement raises an issue about the conditions behind the existence of this market. Some authors support the existence of market clearing mechanisms, while others estimate that passive funds are a substitute for active funds and the higher fees charged for the latter are not justified. We contribute to this discussion by formalizing these two approaches in price-setting strategies in two subgames. To solve it, we resort to an “external body” with a defined role to coordinate investors and mutual funds. We find that, owing to the actions of the external body and the presence of sophisticated investors and a low-quality mutual fund, there are incentives to deliver high-quality service and the active mutual fund market is preserved.

Suggested Citation

  • Lemeunier, Sébastien Michel, 2021. "Information Asymmetry and the Mutual Fund Market," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 440-448.
    • Handle: RePEc:eee:quaeco:v:81:y:2021:i:c:p:440-448
    DOI: 10.1016/j.qref.2020.10.027
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    More about this item

    Keywords

    Pricing; quality; mutual funds; institution;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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