Conflicts of interest, information provision and competition in banking

Patrick Bolton, Xavier Freixas () and Joel Shapiro

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: In some markets, such as the market for drugs or for financial services, sellers have better information than buyers regarding the matching between the buyer's needs and the good's actual characteristics. Depending on the market structure, this may lead to conflicts of interest and/or the underprovision of information by the seller. This paper studies this issue in the market for financial services. The analysis presents a new model of competition between banks, as banks' price competition influences the ensuing incentives for truthful information revelation. We compare two different firm structures, specialized banking, where financial institutions provide a unique financial product, and one-stop banking, where a financial institution is able to provide several financial products which are horizontally differentiated. We show first that, although conflicts of interest may prevent information disclosure under monopoly, competition forces full information provision for sufficiently high reputation costs. Second, in the presence of market power, one-stop banks will use information strategically to increase product differentiation and therefore will always provide reliable information and charge higher rices than specialized banks, thus providing a new justification for the creation of one-stop banks. Finally, we show that, if independent financial advisers are able to provide reliable information, this increases product differentiation and therefore market power, so that it is in the interest of financial intermediaries to promote external independent financial advice.

Keywords: Conflicts of interest; information provision; one-stop (search for similar items in EconPapers)
JEL-codes: D43 D82 G20 L15 (search for similar items in EconPapers)
Date: 2004-06
New Economics Papers: this item is included in nep-com and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Conflicts of Interest, Information Provision and Competition in Banking (2004)
Working Paper: Conflicts of Interest, Information Provision, and Competition in Banking (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:760

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