Gervais, Simon, and Günter Strobl, “Money Management and Real Investment,” Duke University, Working Paper.
We propose and analyze an equilibrium model of money management in which the allocation of funds made by money managers across firms affects the production of these firms. The model produces two main results. First, comparing the performance of money managers to that of the overall market portfolio becomes less appropriate as investors (endogenously) choose to delegate more of their money to them. Indeed, as money managers control more money, their holdings get closer to the market portfolio, making it less likely that they outperform it. Second, although money managers may be outperformed by the market portfolio after their fees are taken into account, it is optimal for investors to delegate their money to them. This is because money managers prompt a more efficient allocation of capital across firms, making the economy more productive and firms more valuable in the process. In fact, as we show, the presence of money managers can improve the welfare of all investors, whether or not these investors choose to delegate their investment decisions to money managers.
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