The Industrial Organization of Financial Market Information Production
Temple University - Department of Finance
William J. Wilhelm
University of Virginia - McIntire School of Commerce
CEPR Discussion Paper No. 5314
In our model, information-producing agents can opt to produce from the sell-side, in which case they can only sell their information to other market participants, or produce from the buy-side, in which case they agent can trade in the financial market. If sell-side information substitutes for that produced on the buy-side, some form of subsidy is necessary to sustain sell-side production in equilibrium because sell-side agents cannot commit to narrow dissemination of their information among buy-side agents. Competition among buy-side agents leaves buy-side (private) information as the primary source of trading profits. Subsidizing sell-side research promotes welfare because such information enters financial market prices and thereby improves real investment decisions. But subsidies compromise welfare through conflicts of interest facing the sell-side analyst. We derive conditions under which the net welfare effect is positive and shed light on means of managing the tradeoff.
Number of Pages in PDF File: 47
Keywords: Financial analysts, industrial organization, investment banking, conflicts of interest, securities regulation
JEL Classification: D82, G14, G24, L22working papers series
Date posted: January 3, 2006
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