Is There Too Much Benchmarking in Asset Management?

We propose a tractable model of asset management in which benchmarking arises endogenously, and analyze its welfare consequences. Fund managers' portfolios are not contractible they incur private costs running them. Incentive contracts for fund managers create pecuniary externality through their effect on prices. Benchmarking inflates prices creates crowded trades. The crowding reduces the effectiveness incentive others, investors fail to account for. A social planner, recognizing crowding, opts with less provision. planner also delivers lower costs. (JEL D82, D86, G11, G12, G23, G41)