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Legal Protection in Retail Financial Markets

Author

Listed:
  • Bruce Ian Carlin
  • Simon Gervais

Abstract

We model a retail financial institution that outsources its advice services to an intermediary, making the two parties jointly responsible for consumers' experience with the products. In this context, courts that enforce state-contingent legal rules are necessary in order to avoid market breakdowns. To maximize social welfare, the government implements a system of penalties that depends on product characteristics and on the firm's relative ability to control quality. This legal system emphasizes reliable advice over transaction pace. Furthermore, the implicit team structure of the firm and its intermediary prevents self-regulation from achieving the same social efficiency.

Suggested Citation

  • Bruce Ian Carlin & Simon Gervais, 2012. "Legal Protection in Retail Financial Markets," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 1(1), pages 68-108.
    • Handle: RePEc:oup:rcorpf:v:1:y:2012:i:1:p:68-108.
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    More about this item

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • K20 - Law and Economics - - Regulation and Business Law - - - General

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