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Do voluntary payments to advisors improve the quality of financial advice? An experimental deception game

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  • Angelova, Vera
  • Regner, Tobias

Abstract

The market for retail financial products (e.g., investment funds or insurances) is marred by information asymmetries. Clients are not well informed about the quality of these products. They have to rely on the recommendations of advisors. Incentives of advisors and clients may not be aligned, when fees are used by financial institutions to steer advice. We experimentally investigate whether voluntary contract components can reduce the conflict of interest and increase truth telling of advisors. We compare a voluntary payment upfront, an obligatory payment upfront, a voluntary bonus afterwards, and a three-stage design with a voluntary payment upfront and a bonus after. Advisors are most truthful, when mutual opportunities to reciprocate exist, and when the voluntary payment is largest. Our analysis identifies the third stage bonus payment as the key feature for success as it allows for an interplay of reciprocal behavior between clients and advisors.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:jeborg:v:93:y:2013:i:c:p:205-218 DOI: 10.1016/j.jebo.2013.03.022
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    Cited by:

    1. Rudolf Kerschbamer & Daniel Neururer & Alexander Gruber, 2017. "Do the altruists lie less?," Working Papers 2017-18, Faculty of Economics and Statistics, University of Innsbruck, revised 09 Nov 2017.
    2. Glätzle-Rützler, Daniela & Lergetporer, Philipp, 2015. "Lying and age: An experimental study," Journal of Economic Psychology, Elsevier, vol. 46(C), pages 12-25.
    3. 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.
    4. Cappelen, Alexander W. & Sørensen, Erik Ø. & Tungodden, Bertil, 2013. "When do we lie?," Journal of Economic Behavior & Organization, Elsevier, vol. 93(C), pages 258-265.
    5. Sascha Behnk & Iván Barreda-Tarrazona & Aurora García-Gallego, 2017. "An experimental test of reporting systems for deception," Working Papers 2017/11, Economics Department, Universitat Jaume I, Castellón (Spain).
    6. Ismayilov, Huseyn & Potters, Jan, 2013. "Disclosing advisor's interests neither hurts nor helps," Journal of Economic Behavior & Organization, Elsevier, vol. 93(C), pages 314-320.
    7. Reuben, Ernesto & Stephenson, Matt, 2013. "Nobody likes a rat: On the willingness to report lies and the consequences thereof," Journal of Economic Behavior & Organization, Elsevier, vol. 93(C), pages 384-391.
    8. Schneider, Tim & Bizer, Kilian, 2017. "Expert qualification in markets for expert services: A Sisyphean Task?," Center for European, Governance and Economic Development Research Discussion Papers 323, University of Goettingen, Department of Economics.
    9. Azar, Ofer H. & Yosef, Shira & Bar-Eli, Michael, 2013. "Do customers return excessive change in a restaurant?," Journal of Economic Behavior & Organization, Elsevier, vol. 93(C), pages 219-226.
    10. Schneider, Tim & Meub, Lukas & Bizer, Kilian, 2016. "Consumer information in a market for expert services: Experimental evidence," Center for European, Governance and Economic Development Research Discussion Papers 285, University of Goettingen, Department of Economics.
    11. Gneezy, Uri & Rockenbach, Bettina & Serra-Garcia, Marta, 2013. "Measuring lying aversion," Journal of Economic Behavior & Organization, Elsevier, vol. 93(C), pages 293-300.

    More about this item

    Keywords

    Financial advisors; Asymmetric information; Principal–agent; Sender–receiver game; Deception; Reciprocity; Experiments; Voluntary payment;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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