Abstract

http://ssrn.com/abstract=2270072
 


 



Fee Effects


Kathryn Judge


Columbia Law School

May 24, 2013

Columbia Law and Economics Working Paper No. 449

Abstract:     
Intermediaries are a pervasive feature of modern economies. This article draws attention to an under-theorized cost arising from the use of specialized intermediaries — a systematic shift in the mix of transactions consummated. The interests of intermediaries are imperfectly aligned with the parties to a transaction. Intermediaries seek to maximize their fees, a transaction cost from the perspective of the parties. Numerous factors, including the requirement that a transaction create value in excess of the associated fees to proceed and an intermediary’s interest in maintaining a good reputation, constrain an intermediary’s tendency to use its influence in a self-serving manner. Nonetheless, these constraints are generally imperfect. As a result, when parties rely upon influential intermediaries, there is often a shift in the total mix of transactions consummated toward the transaction type that yields the greatest fee for the intermediary involved.

This “fee effect” does more than influence the allocation of gains from trade. The primary cost takes the form of a foregone gain, that is, the difference between the welfare gains produced by the transaction actually consummated and the greater gains that would have been produced had the transaction type not been biased by the intermediary’s self interest. Moreover, reliance upon financial intermediaries can give rise to externalities, altering how capital is allocated in socially costly ways.

The article’s contributions are two-fold. First, it provides a theoretical framework for assessing an intermediary’s tendency and capacity to use its influence in a way that affects the type of transaction consummated. This enables parallels to be drawn across disparate settings. Second, applying that framework, the article shows why fee effects may be particularly great in financial markets. In addition, the article considers ways to address fee effects. As a first step, the article suggests that policymakers and market participants should “follow the fees” to better understand the effects of intermediary influence.

Number of Pages in PDF File: 66

Keywords: financial intermediaries, asset bubbles, reputation

JEL Classification: D21, D61, D62, G20, L14

working papers series





Download This Paper

Date posted: May 27, 2013  

Suggested Citation

Judge, Kathryn, Fee Effects (May 24, 2013). Columbia Law and Economics Working Paper No. 449. Available at SSRN: http://ssrn.com/abstract=2270072 or http://dx.doi.org/10.2139/ssrn.2270072

Contact Information

Kathryn Judge (Contact Author)
Columbia Law School ( email )
435 West 116th Street
New York, NY 10025
United States
HOME PAGE: http://www.law.columbia.edu/fac/Kathryn_Judge
Feedback to SSRN


Paper statistics
Abstract Views: 420
Downloads: 88
Download Rank: 173,659
People who downloaded this paper also downloaded:
1. Interbank Discipline
By Kathryn Judge

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo3 in 0.407 seconds