Limited Awareness and Financial Intermediation

Sarah Auster () and Nicola Pavoni

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: We study the market interaction between financial intermediaries and retail investors, who not only face uncertainty about the performance of the different investments but also have limited awareness of the available investment opportunities. Intermediaries compete for investors via the menu of investment options they offer. We show that when competition is limited, intermediaries restrict their offers to extreme options, e.g. very risky and very safe products. We also consider investor heterogeneity and show that the presence of sophisticated, fully aware investors can impose a negative externality on investors with limited awareness. Self-reported data from customers in the Italian retail investment sector support the key predictions of the model: the menus offered to less knowledgable investors contain few products, most of them are nevertheless perceived to be at the extremes.

Keywords: Unawareness; financial investments; delegation (search for similar items in EconPapers)
JEL-codes: D82 D83 G24 (search for similar items in EconPapers)
Pages: 50
Date: 2020-12
References: Add references at CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Limited Awareness and Financial Intermediation (2022)
Working Paper: Limited Awareness and Financial Intermediation (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:bon:boncrc:crctr224_2020_252

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