Information Production, Endogenous Occupational Choices, and Delegated Portfolio Management

I analyze investors' decisions to be active or passive by introducing opportunity costs of market participation and endogenous occupational choices into a heterogeneous-agent noisy rational expectations equilibrium model. In equilibrium, agents with low information production costs and high initial wealth become retail investors; those with low information production costs but low initial wealth become money managers; and those with high information production costs delegate their portfolio decisions. The model not only explains the relative magnitude of institutional and individual investment in a general equilibrium setting, but also sheds new light on the relationship between investor composition and asset price properties.