Brokerage Commissions and Information Allocation

Posted: 11 Mar 1997

See all articles by Paul J. Irvine

Paul J. Irvine

Neeley School of Business

Eugene Kandel

Hebrew University of Jerusalem - Department of Economics; Centre for Economic Policy Research (CEPR)

Zvi Wiener

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Date Written: December 1996

Abstract

This paper contributes to the literature on the sale of information by studying contracts between brokers and investors. Brennan and Chordia (1993) had shown that commission is frequently a superior contract, since it allows for optimal risk sharing between a risk neutral broker and a risk averse investor. We show that in a more general setting where investors are heterogeneous and their types are unknown to brokers, the commission is always the optimal contract, yet for a different reason. In such an environment commission contracts allow extraction of quasi rents which are due to the fixed costs of trading; the role of commission as risk sharing device is eliminated. We then present the actual commissions schedules and show that the full-service brokers' commission rates are ''too high'' to be explained by either this model or by Brenann and Chordia (1993) alone. Consequently, we introduce another aspect of information sale - the timing of information release, and argue that commission schedule allows brokers to essentially auction the early access to information among their clients. The predictions of the augmented model are consistent with the observed brokerage commission schedules.

JEL Classification: G2, D3

Suggested Citation

Irvine, Paul J. and Kandel, Eugene and Wiener, Zvi, Brokerage Commissions and Information Allocation (December 1996). Available at SSRN: https://ssrn.com/abstract=8170

Paul J. Irvine

Neeley School of Business ( email )

Fort Worth, TX 76129
United States

Eugene Kandel (Contact Author)

Hebrew University of Jerusalem - Department of Economics ( email )

School of Business
Mount Scopus
Jerusalem 91905
Israel
+972 2 588 3137 (Phone)
+972 2 581 6071 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Zvi Wiener

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel
(972)-2-588-3049 (Phone)
(972)-2-588-3105 (Fax)

HOME PAGE: http://pluto.mscc.huji.ac.il/~mswiener/zvi.html

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