Quality adjustment of the Producer Price Index for the mutual fund management industry: Evidence from the United States

Semi-logged multivariate cross-sectional and pooled regressions were estimated to determine the effects of twenty-two key quality characteristics variables on the fees charged in the quasi-competitive mutual fund management industry for the July through December 2000 period. Statistical estimates derived from these regressions were used to test the hypothesis that mutual fund management fees could be explained by the twenty-two key quality variables, and that mutual fund managers are not over-pricing their services.;Assumptions concerning risk and return variables, and other key variables were determined from the Capital Assets Pricing and the Efficiency Market Hypothesis models concerning producer's profit-maximization and investor's utility maximization goals. The null hypothesis was rejected, and it was determined that these key quality variables explained the fees charged in the mutual fund management industry. It was also determined that the mutual fund investors adhered to the semi-strong form of market efficiency.;The risk and return variables were also used in the United States Bureau of Labor Statistics (BLS) Producer Price Index estimation of a producer price index for the mutual fund management industry. However, BLS's estimation failed to account for the effects of the other key quality variables used in the determination of the mutual fund management fees.;This oversight on the part of BLS resulted in an incorrect estimation of the mutual fund management industry producer price index (PPI) due to improper quality-adjustment techniques. To highlight this oversight, a hedonic model was estimated to measure these quality characteristics and to derive values that could be used to correctly quality-adjust the PPI for mutual fund management industry.;Mutual fund management key quality characteristics variables were used to estimate cross-sectional regressions for the July to December 2000 period. In addition, a pooled regression with time dummy variables was estimated to derive the hedonic price index for the mutual fund management industry. This hedonic price index was used to deflate the BLS PPI for the mutual fund management industry. The results indicated that the BLS PPI for the mutual fund management industry was upwardly biased. Mutual fund investors were actually paying too much for the quality of management services being rendered.;The BLS should use this quality adjusted mutual fund management producer price index to deflate the GDP estimates. The Securities and Exchange Commission, other regulatory agencies, and the United States government must be aware of the prices charged for mutual fund management services, and be vigilant for any overpricing in the mutual fund management industry.