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Misselling through Agents

Author

Listed:
  • Roman Inderst
  • Marco Ottaviani

Abstract

This paper analyzes the implications of the inherent conflict between two tasks performed by direct marketing agents: prospecting for customers and advising on the product's "suitability" for the specific needs of customers. When structuring salesforce compensation, firms trade off the expected losses from "misselling" unsuitable products with the agency costs of providing marketing incentives. We characterize how the equilibrium amount of misselling (and thus the scope of policy intervention) depends on features of the agency problem including: the internal organization of a firm's sales process, the transparency of its commission structure, and the steepness of its agents' sales incentives. (JEL M31, M37, M52)

Suggested Citation

  • Roman Inderst & Marco Ottaviani, 2009. "Misselling through Agents," American Economic Review, American Economic Association, vol. 99(3), pages 883-908, June.
  • Handle: RePEc:aea:aecrev:v:99:y:2009:i:3:p:883-908
    Note: DOI: 10.1257/aer.99.3.883
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    References listed on IDEAS

    as
    1. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, January.
    2. Bolton, Patrick & Freixas, Xavier & Shapiro, Joel, 2007. "Conflicts of interest, information provision, and competition in the financial services industry," Journal of Financial Economics, Elsevier, vol. 85(2), pages 297-330, August.
    3. Patrick Bolton & Xavier Freixas & Joel Shapiro, 2004. "Conflicts of Interest, Information Provision, and Competition in Banking," NBER Working Papers 10571, National Bureau of Economic Research, Inc.
    4. Minton, Bernadette & Sanders, Anthony & Strahan, Philip E., 2004. "Securitization by Banks and Finance Companies: Efficient Financial Contracting or Regulatory Arbitrage?," Working Paper Series 2004-25, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    5. Steven D. Levitt & Christopher M. Snyder, 1997. "Is No. News Bad News? Information Transmission and the Role of "Early Warning" in the Principal-Agent Model," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 641-661, Winter.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing
    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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