Efficiently Inefficient Markets for Assets and Asset Management

Nicolae Garleanu, Lasse Heje Pedersen

Research output: Working paperResearch


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." Small investors should be passive, but large and sophisticated investors benefit from searching for informed active managers since their search cost is low relative to capital. Hence, managers with larger and more sophisticated investors are expected to outperform.
Original languageEnglish
Place of PublicationLondon
PublisherCentre for Economic Policy Research
Number of pages65
Publication statusPublished - 2018
SeriesCentre for Economic Policy Research. Discussion Papers


  • Asset management
  • Investment
  • Information
  • Search
  • Efficiency
  • Asset pricing
  • Liquidity

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