When Cheaper is Better: Fee Determination in the Market for Equity Mutual Funds

42 Pages Posted: 30 May 2005

See all articles by Pablo Ruiz-Verdú

Pablo Ruiz-Verdú

Universidad Carlos III de Madrid

Javier Gil-Bazo

Universitat Pompeu Fabra; UPF Barcelona School of Management; Barcelona School of Economics

Date Written: May 17, 2005

Abstract

In this paper, we develop a model of the market for equity mutual funds that captures three key characteristics of this market. First, there is competition among funds. Second, fund managers' ability is not observed by investors before making their investment decisions. And third, some investors do not make optimal use of all available information. The main results of the paper are that 1) price competition is compatible with positive mark-ups in equilibrium; and 2) worse-performing funds set fees that are greater or equal than those set by better-performing funds. These predictions are supported by available empirical evidence.

Keywords: mutual fund fees, mutual fund performance, product quality, asymmetric information, bounded rationality

JEL Classification: L13, L15, G23, D80

Suggested Citation

Ruiz-Verdú, Pablo and Gil-Bazo, Javier, When Cheaper is Better: Fee Determination in the Market for Equity Mutual Funds (May 17, 2005). Available at SSRN: https://ssrn.com/abstract=724862 or http://dx.doi.org/10.2139/ssrn.724862

Pablo Ruiz-Verdú (Contact Author)

Universidad Carlos III de Madrid ( email )

Calle Madrid 126
Getafe, Madrid 28903
Spain
+34 91 624 5801 (Phone)
+34 91 624 9607 (Fax)

Javier Gil-Bazo

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

UPF Barcelona School of Management ( email )

Carrer de Balmes, 132, 134
Barcelona, 08008
Spain

Barcelona School of Economics ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

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