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

See all articles by Patrick Bolton

Patrick Bolton

Imperial College London; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Xavier Freixas

Universitat Pompeu Fabra; Centre for Economic Policy Research (CEPR); Barcelona Graduate School of Economics (Barcelona GSE)

Joel Shapiro

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Multiple version iconThere are 2 versions of this paper

Date Written: June 2004

Abstract

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

Bolton, Patrick and Freixas, Xavier and Shapiro, Joel David, Conflicts of Interest, Information Provision and Competition in Banking (June 2004). Universitat Pompeu Fabra Economics and Business Working Paper No. 760, Available at SSRN: https://ssrn.com/abstract=563850 or http://dx.doi.org/10.2139/ssrn.563850

Patrick Bolton (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Xavier Freixas

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
+34 93 542 2726 (Phone)
+34 93 542 1746 (Fax)

HOME PAGE: http://www.econ.upf.es/~freixas

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

HOME PAGE: http://www.econ.upf.es/~freixas/more/personal1.htm

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Joel David Shapiro

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
+34 93 542 27 18 (Phone)
+34 93 542 17 46 (Fax)

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