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Understanding the Advice of Commissions-Motivated Agents: Evidence from the Indian Life Insurance Market

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  • Santosh Anagol

    ()
    (Wharton School of Business, University of Pennsylvania)

  • Shawn Cole

    ()
    (Harvard Business School, Finance Unit)

  • Shayak Sarkar

    ()
    (Harvard University)

Abstract

We conduct a series of field experiments to evaluate the quality of advice provided by life insurance agents in India. Agents overwhelmingly recommend unsuitable, strictly dominated products, which provide high commissions to the agent. Agents cater to the beliefs of uninformed consumers, even when those beliefs are wrong. We test whether regulation or the market can improve advice. A natural experiment requiring disclosure of commissions for a specific product results in agents recommending alternative products with high commissions but no disclosure requirement. Market discipline does generate de-biasing, with agents perceiving greater competition more likely to recommend a suitable product.

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Bibliographic Info

Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 12-055.

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Length: 59 pages
Date of creation: Jan 2012
Date of revision: Jan 2013
Handle: RePEc:hbs:wpaper:12-055

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  2. James Choi & David Laibson & Brigitte Madrian, 2008. "Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds," Yale School of Management Working Papers amz2369, Yale School of Management, revised 05 May 2008.
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  4. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2009. "Reinforcement Learning and Savings Behavior," Journal of Finance, American Finance Association, vol. 64(6), pages 2515-2534, December.
  5. Nava Ashaf & Dean Karlan & Wesley Yin, 2004. "Tying odysseus to the mast: Evidence from a commitment savings product in the philippines," Natural Field Experiments 00206, The Field Experiments Website.
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  7. Diane Del Guercio & Jonathan Reuter & Paula A. Tkac, 2010. "Broker Incentives and Mutual Fund Market Segmentation," NBER Working Papers 16312, National Bureau of Economic Research, Inc.
  8. Carlin, Bruce I., 2009. "Strategic price complexity in retail financial markets," Journal of Financial Economics, Elsevier, vol. 91(3), pages 278-287, March.
  9. Diamond, Douglas W, 1985. " Optimal Release of Information by Firms," Journal of Finance, American Finance Association, vol. 40(4), pages 1071-94, September.
  10. Xavier Gabaix & David Laibson, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 505-540, May.
  11. Sendhil Mullainathan & Markus Noeth & Antoinette Schoar, 2012. "The Market for Financial Advice: An Audit Study," NBER Working Papers 17929, National Bureau of Economic Research, Inc.
  12. Sanford Grossman, 1989. "The Informational Role of Prices," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572141, December.
  13. Daniel Bergstresser & John M. R. Chalmers & Peter Tufano, 2009. "Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry," Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 4129-4156, October.
  14. Victor Stango & Jonathan Zinman, 2009. "Exponential Growth Bias and Household Finance," Journal of Finance, American Finance Association, vol. 64(6), pages 2807-2849, December.
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Cited by:
  1. Justine S. Hastings & Brigitte C. Madrian & William L. Skimmyhorn, 2012. "Financial Literacy, Financial Education and Economic Outcomes," NBER Working Papers 18412, National Bureau of Economic Research, Inc.
  2. Xavier Gine & James Vickery & Shawn Cole, 2013. "How Does Risk Management Influence Production Decisions? Evidence From a Field Experiment," 2013 Meeting Papers 676, Society for Economic Dynamics.
  3. Monika Halan & Renuka Sane & Susan Thomas, 2013. "Estimating losses to customers on account of mis-selling life insurance policies in India," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2013-007, Indira Gandhi Institute of Development Research, Mumbai, India.
  4. Hunt Allcott & Richard Sweeney, 2014. "Information Disclosure through Agents: Evidence from a Field Experiment," NBER Working Papers 20048, National Bureau of Economic Research, Inc.
  5. Jennifer Brown & Dylan B. Minor, 2012. "Misconduct in Credence Good Markets," NBER Working Papers 18608, National Bureau of Economic Research, Inc.
  6. Roman Inderst & Marco Ottaviani, 2012. "Financial Advice," Journal of Economic Literature, American Economic Association, vol. 50(2), pages 494-512, June.
  7. Santosh Anagol & Vijaya Marisetty & Renuka Sane & Buvaneshwaran Venugopal, 2013. "Distribution fees and mutual fund flows: Evidence from a natural experiment in the Indian mutual funds market," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2013-004, Indira Gandhi Institute of Development Research, Mumbai, India.

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