The Industrial Organization of Financial Market Information Production

William J Wilhelm and Zhaohui Chen

No 5314, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In our model, information-producing agents can opt to produce from the sell-side, in which case they can only sell their information to other market participants, or produce from the buy-side, in which case they agent can trade in the financial market. If sell-side information substitutes for that produced on the buy-side, some form of subsidy is necessary to sustain sell-side production in equilibrium because sell-side agents cannot commit to narrow dissemination of their information among buy-side agents. Competition among buy-side agents leaves buy-side (private) information as the primary source of trading profits. Subsidizing sell-side research promotes welfare because such information enters financial market prices and thereby improves real investment decisions. But subsidies compromise welfare through conflicts of interest facing the sell-side analyst. We derive conditions under which the net welfare effect is positive and shed light on means of managing the tradeoff.

Keywords: Financial analysts; Industrial organization; Investment banking; Conflicts of interest; Securities regulation (search for similar items in EconPapers)
JEL-codes: D82 G14 G24 L22 (search for similar items in EconPapers)
Date: 2005-10
New Economics Papers: this item is included in nep-cfn, nep-com, nep-fin, nep-fmk and nep-reg
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