Competition and Incentives in the Mutual Fund Industry: Evidence From Product Development Strategies

ABSTRACT Despite extensive evidence of how competition in the mutual fund industry affects fees and performance outcomes, less is known about its effect on the incentives of market participants. This paper examines how competition drives product development in mutual fund families. The results show that greater industry competition encourages fund families to focus more on enhancing product quality than altering the fund base. Quality development increases the performance of family‐affiliated funds, ultimately benefiting investors. Based on these results, I argue that competition helps mitigate conflicts of interest associated with the family‐based structure of the industry.