Read the working paper
INSEAD Working Paper 2014/29/EFE/FIN revised version of 2013/78/EFE/FIN
The mutual fund industry consists of heterogeneous managers and investors. Hence, traditional models of delegated portfolio management need to be extended to allow heterogeneity. We propose that this extension can be modeled as a dual matching-contracting problem of endogenously repeated trust games, and demonstrate that dual matching and contracting efficiency can be achieved in an equilibrium in which more risk tolerant funds are matched with investors more inert to negative information and in which all managers exert effort. Empirical tests based on the investigation of mutual fund scandal in 2003 are largely consistent with the dual efficiency equilibrium.