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Conflict of Interest, Disclosure, and Vertical Relationships: An Experimental Analysis


  • Paul Chen
  • Martin Richardson


Vertical integration between providers of financial advice and producers of financial products is not uncommon. We consider the impact of disclosure where full disclosure of the incentives of an advisor to recommend the product of an upstream affiliate rather than from some other producer is not possible. We report the results of an experiment in which an informed advisor recommends to a less informed client one of two potential assets to purchase and also a price to offer. In one setting the incentives of the two players are fully aligned but in another the advisor receives an additional payment for selling one of the assets. We consider two treatments – with and without disclosure to the client of the advisor’s interests. With disclosure, the client is only informed of the presence but not the size of an additional payment the advisor receives for selling one of the assets. We find that an advisor’s conflict of interest influences their asset recommendation away from the asset that best serves the client’s interests. The partial disclosure of the advisor’s conflict of interest as common knowledge seems to influence neither the advisor’s recommended asset nor, more surprisingly, the client’s likelihood of rejecting the advisor’s recommendation. However, we do find that disclosure results in a larger financial payoff for the client in our experimental setup.

Suggested Citation

  • Paul Chen & Martin Richardson, 2016. "Conflict of Interest, Disclosure, and Vertical Relationships: An Experimental Analysis," ANU Working Papers in Economics and Econometrics 2016-647, Australian National University, College of Business and Economics, School of Economics.
  • Handle: RePEc:acb:cbeeco:2016-647

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    References listed on IDEAS

    1. Daylian M. Cain & George Loewenstein & Don A. Moore, 2011. "When Sunlight Fails to Disinfect: Understanding the Perverse Effects of Disclosing Conflicts of Interest," Journal of Consumer Research, Oxford University Press, vol. 37(5), pages 836-857.
    2. Bryan K. Church & Xi (Jason) Kuang, 2009. "Conflicts of Interest, Disclosure, and (Costly) Sanctions: Experimental Evidence," The Journal of Legal Studies, University of Chicago Press, vol. 38(2), pages 505-532, June.
    3. Harrison Hong & Jeffrey D. Kubik, 2003. "Analyzing the Analysts: Career Concerns and Biased Earnings Forecasts," Journal of Finance, American Finance Association, vol. 58(1), pages 313-351, February.
    4. Beyer, Max & de Meza, David & Reyniers, Diane, 2013. "Do financial advisor commissions distort client choice?," Economics Letters, Elsevier, vol. 119(2), pages 117-119.
    5. 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.
    6. Crawford, Vincent, 1998. "A Survey of Experiments on Communication via Cheap Talk," Journal of Economic Theory, Elsevier, vol. 78(2), pages 286-298, February.
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    More about this item


    Experiment; financial advice; disclosure; conflict of interest;

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • D04 - Microeconomics - - General - - - Microeconomic Policy: Formulation; Implementation; Evaluation

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