A Theory of Investment Modes: the Coexistence of Financial Delegation and Individual Market Participation

Unlike traditional \u85nancial intermediation theories that rely mainly on transaction costs, asymmetric information, or e ¢ ciency in information technology, this paper uses participation costs and population e¤ect to explain the coexistence of \u85nancial delegation and individual market par-ticipation. By allowing agents to freely choose among three investment modes, namely, direct participation in the \u85nancial market, institutional management of funds, and delegating investment decisions to profession-als, I \u85nd the existence of a Nash equilibrium where all three investment strategies are pursued. It is shown that the existence of equilibrium does not depend on whether \u85nancial intermediaries work or shirk and that the strategic concerns of di¤erent information bearers render the decentralized equilibrium not pareto optimal.