The Determinants of Management Expenses

This paper develops a model which explains the determinants of the management expenses charged by U.S. equity funds. The study shows that for high quality managers, an increase in quality is associated with higher fees. In contrast, as the quality of the lower quality managers deteriorates, their fees increase. A non-linear negative relationship is found between the size of a fund and its management expenses. Economies of scope are also shown to exist between the number of funds within a mutual fund complex and the management expenses charged investors. Finally, while 12b-1 fees have been thought of as a substitute for load charges, this paper suggests that they are complements.

Management Compensation and the Performance of Mutual Funds

This paper examines the mutual fund market as a market for the sale of management services using an unbalanced panel of 860 US equity funds over the 1976-1993 period. From among the performance measures for which investors have the necessary information to compute, we find that the Jensen measure best explains the change in market shares over time. It is found, however, that investors actually value the systematic component of risk more than indicated by the use of Jensen's performance measure. Our results also suggest that investors in load funds are less responsive to both components of performance (risk and return) than are investors in no-load funds. Investors, moreover, value recent past performance differently for funds with different attributes. An important result of the paper relating to the incentives provided with the widely used fixed-fee compensation schemes is that past fund performance influences individual investment decisions and hence future net asset values of funds, implying strong incentives for managers to increase their performance and by doing so, their compensation.

Advertising, Consumer Information, and Product Quality

This article analyzes a monopolist's quality and advertising policies and evaluates their social optimality. Our model considers a rational, though not fully informed, consumer who holds prior perceptions about aspects of quality, which determine his purchase pattern. These quality perceptions constitute the product's goodwill. Differences between expected and experienced quality lead to reevaluation of expectations. Monopolists affect these perceptions, and hence build up goodwill, by advertising and quality attribute variations. These affect consumer welfare directly and indirectly by their informational content. We find that advertising may profitably mislead, at least in the short run. Although the welfare effects of a monopolist's quality and advertising policies are not generally determinate, even when information is untrue, we are able to evaluate the welfare determinants of advertising policy from an objective standard and to specify some of the conditions under which advertising is socially excessive.

An Economic Theory of Leadership Turnover

In an infinite horizon model, a leader of a group of citizens exerts effort in each period to maintain a public good that enhances the profits of a group of kingmakers. In each period, the kingmakers decide whether to overthrow the leader so as to have a chance of becoming the leader. Consistent with the empirical literature, we find that (1) leadership turnover occurs when the kingmakers' expected earnings are low; (2) leadership turnover declines with duration in office; (3) leadership turnover declines as the technology for providing the public good improves; (4) leadership turnover increases as the number of kingmakers increases. This paper grew out of Gallego (1995, chapter 2). We thank Jeffrey Banks, Nancy Gallini, Ed Green, Arthur Hosios, Yehuda Kotowitz, Martin J. Osborne, Mike Peters, Anatol Rapoport, Aloysius Siow, and Myrna Wooders for helpful comments and discussions. We are grateful to Arthur Hosios and Martin J. Osborne for reading an earlier draft and making many valua..