American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
Adviser Compensation, Endogenous Entry, and the Advice Gap
American Economic Journal: Microeconomics
vol. 14,
no. 3, August 2022
(pp. 76–130)
Abstract
To prevent biased advice, regulators increasingly ban commission payments to financial advisers. Such bans are associated with "advice gaps," meaning that advice becomes less accessible. To understand the trade-off between the quality and accessibility of advice, this paper develops a model of price competition in advice markets with endogenous entry of advisers. While commission bans increase consumer surplus in the short run, they hurt the profitability of advisers. In the long run, advisers exit the market, advice becomes inaccessible, and consumer surplus decreases. These results imply that accounting for the endogeneity of market structure is important when regulating advice.Citation
Thiel, Jurre H. 2022. "Adviser Compensation, Endogenous Entry, and the Advice Gap." American Economic Journal: Microeconomics, 14 (3): 76–130. DOI: 10.1257/mic.20200074Additional Materials
JEL Classification
- D82 Asymmetric and Private Information; Mechanism Design
- J33 Compensation Packages; Payment Methods
- L51 Economics of Regulation
- L84 Personal, Professional, and Business Services
- L88 Industry Studies: Services: Government Policy
- M52 Personnel Economics: Compensation and Compensation Methods and Their Effects
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