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Competition through Commissions and Kickbacks

Author

Listed:
  • Roman Inderst
  • Marco Ottaviani

Abstract

In markets for retail financial products and health services, consumers often rely on the advice of intermediaries to decide which specialized offering best fits their needs. Product providers, in turn, compete to influence the intermediaries' advice through hidden kickbacks or disclosed commissions. Motivated by the controversial role of these widespread practices, we formulate a model to analyze competition through commissions from a positive and normative standpoint. The model highlights the role of commissions in making the advisor responsive to supply-side incentives. We characterize situations when commonly adopted policies such as mandatory disclosure and caps on commissions have unintended welfare consequences. (JEL D21, D82, D83, G21, L15, L25)

Suggested Citation

  • Roman Inderst & Marco Ottaviani, 2012. "Competition through Commissions and Kickbacks," American Economic Review, American Economic Association, vol. 102(2), pages 780-809, April.
  • Handle: RePEc:aea:aecrev:v:102:y:2012:i:2:p:780-809
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    References listed on IDEAS

    as
    1. Jack High (ed.), 2001. "Competition," Books, Edward Elgar Publishing, number 1751.
    2. Lewis, Tracy R & Sappington, David E M, 1994. "Supplying Information to Facilitate Price Discrimination," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(2), pages 309-327, May.
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    5. Heski Bar-Isaac & Guillermo Caruana & Vicente Cuñat, 2010. "Information Gathering and Marketing," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(2), pages 375-401, June.
    6. Cynthia J. Pahl, 2007. "A compilation of state mortgage broker laws and regulations, 1996-2006," Community Affairs Report 2007-2, Federal Reserve Bank of Minneapolis.
    7. Daylian M. Cain & George Loewenstein & Don A. Moore, 2005. "The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of Interest," The Journal of Legal Studies, University of Chicago Press, vol. 34(1), pages 1-25, January.
    8. Alessandro Lizzeri, 1999. "Information Revelation and Certification Intermediaries," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 214-231, Summer.
    9. Li, Ming & Madarász, Kristóf, 2008. "When mandatory disclosure hurts: Expert advice and conflicting interests," Journal of Economic Theory, Elsevier, vol. 139(1), pages 47-74, March.
    10. Juan-JosÈ Ganuza & JosÈ S. Penalva, 2010. "Signal Orderings Based on Dispersion and the Supply of Private Information in Auctions," Econometrica, Econometric Society, vol. 78(3), pages 1007-1030, May.
    11. Bester, Helmut, 1992. "Bertrand Equilibrium in a Differentiated Duopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(2), pages 433-448, May.
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    Citations

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    Cited by:

    1. Ma, Ching-to Albert & Mak, Henry Y., 2015. "Information disclosure and the equivalence of prospective payment and cost reimbursement," Journal of Economic Behavior & Organization, Elsevier, vol. 117(C), pages 439-452.
    2. repec:eee:jeborg:v:140:y:2017:i:c:p:287-316 is not listed on IDEAS
    3. Gathergood, John & Weber, Jörg, 2017. "Financial literacy, present bias and alternative mortgage products," Journal of Banking & Finance, Elsevier, vol. 78(C), pages 58-83.
    4. Larry G. Epstein & Hiroaki Kaido & Kyoungwon Seo, 2016. "Robust Confidence Regions for Incomplete Models," Econometrica, Econometric Society, vol. 84, pages 1799-1838, September.
    5. Alexandre Cornière & Greg Taylor, 2014. "Integration and search engine bias," RAND Journal of Economics, RAND Corporation, vol. 45(3), pages 576-597, September.
    6. Archishman Chakraborty & Rick Harbaugh, 2012. "Persuasive Puffery," Working Papers 2012-05, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    7. Calcagno, Riccardo & Giofré, Maela & Urzì-Brancati, Maria Cesira, 2017. "To trust is good, but to control is better: How investors discipline financial advisors’ activity," Journal of Economic Behavior & Organization, Elsevier, vol. 140(C), pages 287-316.
    8. William Fuchs & Luis Garicano & Luis Rayo, 2015. "Optimal Contracting and the Organization of Knowledge," Review of Economic Studies, Oxford University Press, vol. 82(2), pages 632-658.
    9. Sergei Kovbasyuk, 2013. "Seller - paid Ratings," EIEF Working Papers Series 1330, Einaudi Institute for Economics and Finance (EIEF), revised Nov 2013.
    10. Roman Inderst & Marco Ottaviani, 2012. "Financial Advice," Journal of Economic Literature, American Economic Association, vol. 50(2), pages 494-512, June.
    11. repec:eee:ecolet:v:162:y:2018:i:c:p:167-170 is not listed on IDEAS
    12. Mariya Teteryatnikova & James Tremewan, 2016. "An offer you can refuse: the effects of transparency with endogenous conflict of interest," Vienna Economics Papers 1602, University of Vienna, Department of Economics.
    13. Ugo Panizza, 2015. "Billions on the Sidewalk: Improving Savings by Reducing Investment Mistakes," IHEID Working Papers 18-2015, Economics Section, The Graduate Institute of International Studies.
    14. Yiquan Gu & Tobias Wenzel, 2014. "Strategic Obfuscation and Consumer Protection Policy," Journal of Industrial Economics, Wiley Blackwell, vol. 62(4), pages 632-660, December.
    15. Vera Angelova & Tobias Regner, 2016. "Can a Bonus Overcome Moral Hazard? An Experiment on Voluntary Payments, Competition, and Reputation in Markets for Expert Services," SFB 649 Discussion Papers SFB649DP2016-027, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    16. Inderst, Roman, 2015. "Regulating commissions in markets with advice," International Journal of Industrial Organization, Elsevier, vol. 43(C), pages 137-141.
    17. Wonsuk Chung & Rick Harbaugh, 2012. "Biased Recommendations," Working Papers 2012-02, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    18. Aghadadashli, Hamid & Dertwinkel-Kalt, Markus & Wey, Christian, 2016. "The Nash bargaining solution in vertical relations with linear input prices," Economics Letters, Elsevier, vol. 145(C), pages 291-294.
    19. Opp, Christian C. & Opp, Marcus M. & Harris, Milton, 2013. "Rating agencies in the face of regulation," Journal of Financial Economics, Elsevier, vol. 108(1), pages 46-61.
    20. Chade, Hector & Kovrijnykh, Natalia, 2016. "Delegated information acquisition with moral hazard," Journal of Economic Theory, Elsevier, vol. 162(C), pages 55-92.
    21. Angelova, Vera & Regner, Tobias, 2013. "Do voluntary payments to advisors improve the quality of financial advice? An experimental deception game," Journal of Economic Behavior & Organization, Elsevier, vol. 93(C), pages 205-218.

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • 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
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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