Credence Goods, Price, and Quality

When sellers set the price for ex-ante unobservable and ex-post unenforceable quality, price signals credence quality. Hedge funds resemble incomplete long-term contracts for credence goods under buyer-determined auctions. I show that hedge funds' ability to solicit investments at higher management fees signals their capacity to generate higher net returns. This result is more pronounced during bust cycles and closer to financial hubs, i.e., when signaling quality is more valuable. The findings are relevant to understanding price and effort in the provision of credence goods like medical procedures and legal advice.