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The Industrial Organization of Financial Market Information Production

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  • Chen, Zhaohui
  • Wilhelm Jr, William J
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    Abstract

    In our model, information-producing agents can opt to produce from the sell-side, in which case they can only sell their information to other market participants, or produce from the buy-side, in which case they agent can trade in the financial market. If sell-side information substitutes for that produced on the buy-side, some form of subsidy is necessary to sustain sell-side production in equilibrium because sell-side agents cannot commit to narrow dissemination of their information among buy-side agents. Competition among buy-side agents leaves buy-side (private) information as the primary source of trading profits. Subsidizing sell-side research promotes welfare because such information enters financial market prices and thereby improves real investment decisions. But subsidies compromise welfare through conflicts of interest facing the sell-side analyst. We derive conditions under which the net welfare effect is positive and shed light on means of managing the tradeoff.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5314.

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    Date of creation: Oct 2005
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    Handle: RePEc:cpr:ceprdp:5314

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    Related research

    Keywords: conflicts of interest; financial analysts; industrial organization; investment banking; securities regulation;

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