The Market for Conflicted Advice
43 Pages Posted: 26 Sep 2016 Last revised: 28 Oct 2019
Date Written: September 24, 2016
We study decentralized markets in which advisers have conflicts of interest and compete for customers via information provision. We show that competition partially disciplines conflicted advisers. The equilibrium features information dispersion and sorting of heterogeneous customers and advisers: advisers with expertise in more information sensitive assets attract less informed customers, provide worse information, and earn higher profits. We further apply our framework to the market for financial advice and establish new insights: it is the underlying distribution of financial literacy that determines the consumers’ welfare. When advisers are scarce, the fee structure of advisers is irrelevant for the welfare of consumers.
Keywords: Information Provision, Conflicted Advice, Two-Sided Matching, Sorting
JEL Classification: C78, D83, G11, G23
Suggested Citation: Suggested Citation