Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/97734
Authors: 
Inderst, Roman
Year of Publication: 
2009
Series/Report no.: 
IMFS Working Paper Series 35
Abstract: 
This paper considers a firm that has to delegate to an agent, such as a mortgage broker or a security dealer, the twin tasks of approaching and advising customers. The main contractual restriction, in particular in light of related research in Inderst and Ottaviani (2007), is that the firm can only compensate the agent through commissions. This standard contracting restriction has the following key implications. First, the firm can only ensure internal compliance to a standard of sales, in terms of advice for the customer, if this standard is not too high. Second, if this is still feasible, then a higher standard is associated with higher, instead of lower, sales commissions. Third, once the limit for internal compliance is approached, tougher regulation and prosecution of misselling have (almost) no effect on the prevailing standard. Besides having practical implications, in particular on how to (re-)regulate the sale of financial products, the novel model, which embeds a problem of advice into a framework with repeated interactions, may also be of separate interest for future work on sales force compensation.
JEL: 
D18
D83
M31
M52
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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