Conflicts of Interest, Information Provision and Competition in Banking

Abstract:     
In the market for financial services, sellers may have better information than buyers regarding the match between a buyer's needs and the good's characteristics. This may lead to conflicts of interest and/or the underprovision of information by the seller. We compare two firm structures, specialized banking, where a unique financial product is provided, and one-stop banking, where several products are provided. We show that, although conflicts of interest may prevent information disclosure under monopoly, competition forces full information provision for sufficiently high reputation costs. Secondly, in the presence of market power, one-stop banks will provide reliable information and charge higher prices than specialized banks, providing a new justification for one-stop banks. Finally, if independent financial advisers are able to provide information, this increases product differentiation and hence market power, so it is in the interest of banks to promote external independent financial advice.

Number of Pages in PDF File: 45

Keywords: Conflicts of interest, information provision, one-stop

JEL Classification: D43, D82, G20, L15

working papers series