Delegated Learning and Contract Commonality in Asset Management

In the presence of moral hazard and costly information acquisition, we show that absolute performance pay and benchmarking naturally arise as part of the contract between investors and active managers. The commonality in compensation incentives across funds, however, gives rise to externalities. By distorting expected returns and asset price informativeness, these contract incentives feed back into active managers' information acquisition and investors' capital allocations to active management. This leads to less ambitious benchmarking and performance-based incentives, but excessive fixed fees and too large an active industry relative to a constrained efficient benchmark. Further, this commonality contributes to the inconsistency of widely-adopted measures of active manager skill