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Explicit and implicit incentives in fund management

Kristiansen, Eirik Gaard
Working paper
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URI
http://hdl.handle.net/11250/162946
Date
2001-01
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  • Discussion papers (SAM) [578]
Abstract
Fund managers compete to attract new investors. Competition and fund management

contracts provide implicit and explicit incentives for fund management. I study the

combined effect of these two types of incentives on i) investors’ search for talented fund

managers and on ii) talented fund managers’ use of private investment signals. I show

that an intermediate level of competition yields less efficient use of private investment

signals and a lower average rate of return than in the case of either a high or a low level

of competition in the fund management industry. Furthermore, I show that although

explicit incentives improve managers’ use of private information, they may harm new

investors’ search for talented fund managers. Explicit incentives may improve current performance, but cause prospective performance of the fund industry to deteriorate.
Publisher
Norwegian School of Economics and Business Administration. Department of Economics
Series
Discussion paper
2001:1

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