Conflicts of Interest, Information Provision and Competition in Banking
Universitat Pompeu Fabra Economics and Business Working Paper No. 760
45 Pages Posted: 12 Jul 2004
Date Written: June 2004
In the market for financial services, sellers may have better information than buyers regarding the match between a buyer's needs and the good's characteristics. This may lead to conflicts of interest and/or the underprovision of information by the seller. We compare two firm structures, specialized banking, where a unique financial product is provided, and one-stop banking, where several products are provided. We show that, although conflicts of interest may prevent information disclosure under monopoly, competition forces full information provision for sufficiently high reputation costs. Secondly, in the presence of market power, one-stop banks will provide reliable information and charge higher prices than specialized banks, providing a new justification for one-stop banks. Finally, if independent financial advisers are able to provide information, this increases product differentiation and hence market power, so it is in the interest of banks to promote external independent financial advice.
Keywords: Conflicts of interest, information provision, one-stop
JEL Classification: D43, D82, G20, L15
Suggested Citation: Suggested Citation