Competition in fund management industry impacts investors and fund managers' returns.
Fund managers use both implicit and explicit incentives to attract investors. The level of competition in the industry affects how well managers use private information and the average rate of return. Medium competition leads to less efficient use of private signals and lower returns compared to high or low competition. Explicit incentives can improve managers' use of private information but may make it harder for new investors to find talented managers. While explicit incentives can boost current performance, they might harm future performance of the fund industry.
