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Do voluntary payments to advisors improve the quality of financial advice? An experimental deception game

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  • Angelova, Vera
  • Regner, Tobias

Abstract

The market for retail financial products (e.g., investment funds or insurances) is marred by information asymmetries. Clients are not well informed about the quality of these products. They have to rely on the recommendations of advisors. Incentives of advisors and clients may not be aligned, when fees are used by financial institutions to steer advice. We experimentally investigate whether voluntary contract components can reduce the conflict of interest and increase truth telling of advisors. We compare a voluntary payment upfront, an obligatory payment upfront, a voluntary bonus afterwards, and a three-stage design with a voluntary payment upfront and a bonus after. Advisors are most truthful, when mutual opportunities to reciprocate exist, and when the voluntary payment is largest. Our analysis identifies the third stage bonus payment as the key feature for success as it allows for an interplay of reciprocal behavior between clients and advisors.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 93 (2013)
Issue (Month): C ()
Pages: 205-218

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Handle: RePEc:eee:jeborg:v:93:y:2013:i:c:p:205-218

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Web page: http://www.elsevier.com/locate/jebo

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Keywords: Financial advisors; Asymmetric information; Principal–agent; Sender–receiver game; Deception; Reciprocity; Experiments; Voluntary payment;

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References

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Cited by:
  1. Gneezy, Uri & Rockenbach, Bettina & Serra-Garcia, Marta, 2013. "Measuring lying aversion," Journal of Economic Behavior & Organization, Elsevier, vol. 93(C), pages 293-300.
  2. Reuben, Ernesto & Stephenson, Matt, 2013. "Nobody likes a rat: On the willingness to report lies and the consequences thereof," Journal of Economic Behavior & Organization, Elsevier, vol. 93(C), pages 384-391.
  3. Azar, Ofer H. & Yosef, Shira & Bar-Eli, Michael, 2013. "Do customers return excessive change in a restaurant?," Journal of Economic Behavior & Organization, Elsevier, vol. 93(C), pages 219-226.

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