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Limited Awareness and Financial Intermediation

Author

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  • Sarah Auster

    (Department of Economics, University of Bonn)

  • Nicola Pavoni

    (Department of Economics, Bocconi University)

Abstract

We study the market interaction between financial intermediaries and retail in-vestors, who have limited awareness of the available investment opportunities. Inter-mediaries compete for investors via the menu of investment options they offer. We show that, when facing investors with little prior knowledge, intermediaries restrict their offers to extreme options, e.g. very risky and very safe products. In the case where investors are privately informed about their awareness, the presence of sophisti-cated, fully aware investors can impose negative externalities on investors with limited awareness. Self-reported data from customers in the Italian retail investment sector support the key predictions of the model.

Suggested Citation

  • Sarah Auster & Nicola Pavoni, 2020. "Limited Awareness and Financial Intermediation," ECONtribute Discussion Papers Series 043, University of Bonn and University of Cologne, Germany.
    • Handle: RePEc:ajk:ajkdps:043
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    References listed on IDEAS

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    Cited by:

    1. Johannes Gierlinger & Pau Milán, 2021. "The Limits to Local Insurance," Working Papers 1293, Barcelona School of Economics.
    2. Zhengqing Gui & Yangguang Huang & Xiaojian Zhao, 2020. "Financial Fraud and Investor Awareness," HKUST CEP Working Papers Series 202002, HKUST Center for Economic Policy.
    3. Auster, Sarah & Pavoni, Nicola, 2024. "Optimal delegation and information transmission under limited awareness," Theoretical Economics, Econometric Society, vol. 19(1), January.
    4. Zhongwen Chen & Xiaojian Zhao, 2023. "Strategic Information Suppression in Borrowing and Pre-Lending Cognition: Theory and Evidence," Games, MDPI, vol. 14(3), pages 1-24, May.
    5. Sarah Auster & Nicola Pavoni, 2021. "Optimal Delegation and Information Transmission under Limited Awareness," ECONtribute Discussion Papers Series 059, University of Bonn and University of Cologne, Germany.

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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