Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/184977
Authors: 
Honda, Jun
Inderst, Roman
Year of Publication: 
2017
Series/Report no.: 
Working Papers in Economics and Statistics No. 2017-26
Abstract: 
We analyze firms' competition to steer an advisor's recommendations through potentially non-linear incentives. Even when firms are symmetric, so that the overall size of compensation would not distort advice when incentives were linear, advice is biased when firms are allowed to make compensation non-linear, which they optimally do. Policies that target an advisor's liability are largely ineffective, as firms react to such increased liability by making incentives even steeper, increasing bonus payments while reducing the linear (commission) part at the same time. This observation may justify policymakers' direct interference with firms' compensation practice, as frequently observed notably in consumer finance.
Subjects: 
Nonlinear Incentives
Advice
Consumer Protection
Financial Regulation
JEL: 
L51
M52
Document Type: 
Working Paper

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