Adviser Compensation, Endogenous Entry, and the Advice Gap

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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.
Original languageEnglish
JournalAmerican Economic Journal: Microeconomics
Number of pages59
ISSN1945-7669
Publication statusPublished - 16 Dec 2020

Bibliographical note

Epub ahead of print. Published online: December 16, 2020
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