Adviser Compensation, Endogenous Entry, and the Advice Gap

Jurre H. Thiel

American Economic Journal: Microeconomics, 2022, vol. 14, issue 3, 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.

JEL-codes: D82 J33 L51 L84 L88 M52 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:aea:aejmic:v:14:y:2022:i:3:p:76-130

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DOI: 10.1257/mic.20200074

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