Search Costs and Mutual Fund Fee Dispersion
Posted: 10 Dec 2008 Last revised: 6 Apr 2015
Date Written: November 1, 2008
In this paper, we analyze the effect of search costs on mutual fund fee dispersion. Using a heteroscedastic regression model, we can quantify the portion of the expense ratio (net of 12b-1 fees) not justified by the quality of the service provided, the cost structure of the investment company or the specificities of the clientele served by the fund. We show that the dispersion of this residual fee is lower for highly visible funds and for funds that heavily invest in marketing. We also document that the effect of our search cost proxy variables is economically meaningful and symmetrical, yielding to a reduction of both the probabilities to charge uncommonly high or uncommonly low fees. We argue that this result is relevant for the evaluation of the competitiveness of the US mutual fund market because it quantifies the extent to which market participants are able to charge non-marginal prices for homogeneous products.
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Keywords: mutual funds, expense ratios, price dispersion
JEL Classification: G14, G23
Suggested Citation: Suggested Citation