Financial Intermediaries and Agency Problems With and Without Vertical Incentives

65 Pages Posted: 9 Apr 2021

See all articles by Yeonjoon Lee

Yeonjoon Lee

The Federal Reserve Bank of Richmond

Date Written: March 9, 2021

Abstract

I study agency problems between brokers and investors in the retail bond market. The
presence of suitability or fiduciary regulations, which govern transactions in this setting, can
lead to tensions for brokers between maximizing their own profit and acting in the best interests
of their customers. This paper measures the degree to which these conflicting incentives
influence brokers by examining the U.S. reverse convertible bond market. While brokers do
consider the profits of investors when making decisions, I estimate that their own profits are
roughly three times more important, suggesting the existence of severe agency problems that
reduce consumer welfare.

Keywords: agency problems; vertical incentives; brokers; intermediaries; consumer finance; structured products

JEL Classification: D12, D14, D18, G21, G24, G28, L14, L42, M52

Suggested Citation

Lee, Yeonjoon, Financial Intermediaries and Agency Problems With and Without Vertical Incentives (March 9, 2021). Available at SSRN: https://ssrn.com/abstract=3821905 or http://dx.doi.org/10.2139/ssrn.3821905

Yeonjoon Lee (Contact Author)

The Federal Reserve Bank of Richmond ( email )

United States

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