In a stock market dominated by passive investors, an interesting question arises as to how the equilibrium level of market efficiency will be maintained. This short article argues that the critical agents in this regard must be the companies that issue the shares, not active investment managers

We develop a new theory of delegated investment whereby managers compete in terms of composition of the portfolios they promise to acquire. We study the resulting asset pricing in the inter-manager market. We incentivize investors so that we obtain sharp predictions. Managers are paid a fixed...