A Mutual Fund Market with Incomplete Information : The Role of an External Body

The literature dealing with price setting and quality assumes by default that investors believe that mutual funds are vertically differentiated. We consider also the case where they do not believe it and we show that it may call the market into question. To solve this problem we assume the existence of an external body to provide a market, composed of two mutual funds, with information. Thanks to its actions and the presence of sophisticated investors, a high quality mutual fund is induced to provide a higher level of quality and we determine a convenient level of quality stated by this external body that is preoccupied by its credibility