We study the determinants of compensation in the mutual fund industry using Israeli tax records. The portfolio manager compensation is influenced by fund flows driven by past raw returns. Managers are thus paid equally for fund superior performance and for the fund’s passive benchmark returns. We interpret these results though a model that combines trust-mediated money management in the spirit of Gennanioli, Shleifer and Vishny (2015) and imperfect labor market competition. In our model, compensation and fund size are jointly determined by expected raw returns and by the level of intermediary’s trustworthiness. Additional empirical evidence confirms the distinct model predictions.
Job Market Paper