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Legal Protection in Retail Financial Markets

Bruce I. Carlin

University of California, Los Angeles (UCLA) - Anderson School of Management

Simon Gervais

Duke University - Fuqua School of Business; Duke Innovation & Entrepreneurship Initiative

November 2, 2008

AFA 2010 Atlanta Meetings Paper

Given the importance of sound advice in retail financial markets and the fact that financial institutions outsource their advice services, how should consumer protection law be set to maximize social welfare? We address this question by posing a theoretical model of retail markets in which a firm and a broker face a bilateral hidden action problem when they service clients in the market. All participants in the market are rational, and prices are set based on consistent beliefs about equilibrium actions of the firm and the broker. We characterize the optimal law, and derive how the legal system splits the blame between parties to the transaction. We also analyze how complexity in assessing clients and conflicts of interest affect the law. Since these markets are large, the implications of the analysis have great welfare import.

Number of Pages in PDF File: 36

Keywords: retail financial market, brokerage, regulation, law, contract, welfare

JEL Classification: G20, G38, D20, D62, K20, K12, L84

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Date posted: March 13, 2009  

Suggested Citation

Carlin, Bruce I. and Gervais, Simon, Legal Protection in Retail Financial Markets (November 2, 2008). AFA 2010 Atlanta Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1358480 or http://dx.doi.org/10.2139/ssrn.1358480

Contact Information

Bruce I. Carlin
University of California, Los Angeles (UCLA) - Anderson School of Management ( email )
110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
Simon Gervais (Contact Author)
Duke University - Fuqua School of Business ( email )
100 Fuqua Drive
Box 90120
Durham, NC 27708-0120
United States
919-660-7683 (Phone)
919-883-5078 (Fax)
HOME PAGE: http://www.fuqua.duke.edu/faculty_research/faculty_directory/gervais/

Duke Innovation & Entrepreneurship Initiative ( email )
215 Morris St., Suite 300
Durham, NC 27701
United States

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References:  69
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