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Does competition aggravate moral hazard? A Multi-Principal-Agent experiment

Olga Rud (), Jean Paul Rabanal () and John Horowitz

Journal of Financial Intermediation, 2018, vol. 33, issue C, 115-121

Abstract: We conduct an experiment to determine whether market structure affects financial intermediary behavior. The intermediaries (Agents) are perfectly informed regarding project types and can recommend that their clients (Principals) either proceed or discontinue a project. Intermediaries earn revenues only when they recommend proceeding with the transaction. Thus, our design captures some of the incentives faced by financial advisers in commercial banks, where compensation depends on sales performance, and also by money-managers, whose income depends on the size of their portfolios. We find that a monopolist intermediary protects the interest of clients better than when intermediaries compete. Our results are robust to a significant fee increase and provide additional evidence on the impact of market structure on individual incentives and equilibrium outcomes.

Keywords: Delegated portfolio management; Conflict of interests; Rating services; Market design; Deception; Laboratory experiment (search for similar items in EconPapers)
JEL-codes: D03 D40 D82 G02 G23 G24 C90 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Does Competition Aggravate Moral Hazard? A Multi-Principal-Agent Experiment (2016) Downloads
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