Information acquisition and mutual funds

We generalize the standard competitive rational expectations equilibrium (Hellwig (1980), Verrecchia (1982)) by studying the possibility that informed agents open mutual funds in order to sell their private information. We illustrate how mutual funds endogenously arise in equilibrium and we characterize the fund managers’ optimal investment management fees under imperfect competition. In our model the household sector views the mutual funds as a new asset class: investing in a stock through an informed agent’s fund is different from investing in the stock directly. The paper further analyzes the incentives to acquire information, and compares these to those that prevail when agents can only trade on their own account. We then study the relationship between the model’s economic primitives and the investment management fees, the size of the mutual fund industry, the informativeness of the risky asset price, price volatility and the equilibrium fraction of informed agents. JEL classification: D82, G14.