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Do Seemingly Smarter Consumers Get Better Advice?

48 Pages Posted: 4 Mar 2015 Last revised: 5 Mar 2015

Tabea Bucher-Koenen

Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA)

Johannes Koenen

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Date Written: February 26, 2015

Abstract

In this paper, we study the interaction between financial advisors and customers with a potential conflict of interest. We show in a simple analytical framework that advisors have an incentive to provide better advice to consumers who appear to be better informed. From this, we derive an identification strategy to infer the quality of advice received from variables observed in a representative survey of German consumers. Our identification strategy makes use of the fact that we observe both a generally observable signal of a customer's financial literacy as well as an objective measure, which is not observed by the advisor. We apply this strategy to three different empirical settings. In each of these settings, we find consistent evidence that consumers with worse signals of financial literacy on average receive worse financial advice. In particular, both women and individuals without tertiary education are negatively affected.

Keywords: financial advice, investment decisions, consumer protection, household finance

JEL Classification: G02, E02, D08

Suggested Citation

Bucher-Koenen, Tabea and Koenen, Johannes, Do Seemingly Smarter Consumers Get Better Advice? (February 26, 2015). Max Planck Institute for Social Law and Social Policy Discussion Paper No. 01-2015. Available at SSRN: https://ssrn.com/abstract=2572961 or http://dx.doi.org/10.2139/ssrn.2572961

Tabea Bucher-Koenen (Contact Author)

Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA) ( email )

Amalienstrasse 33
Munich, 80799
Germany

HOME PAGE: http://mea.mpisoc.mpg.de/

Johannes Koenen

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 81679
Germany

HOME PAGE: http://www.cesifo-group.de/koenen-j

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