Does competition aggravate moral hazard? A Multi-Principal-Agent experiment

Rud, O, Rabanal, J and Horowitz, J 2018, 'Does competition aggravate moral hazard? A Multi-Principal-Agent experiment', Journal of Financial Intermediation, vol. 33, pp. 115-121.


Document type: Journal Article
Collection: Journal Articles

Title Does competition aggravate moral hazard? A Multi-Principal-Agent experiment
Author(s) Rud, O
Rabanal, J
Horowitz, J
Year 2018
Journal name Journal of Financial Intermediation
Volume number 33
Start page 115
End page 121
Total pages 7
Publisher Elsevier
Abstract We conduct an experiment to determine whether market structure affects financial intermediary behavior. The intermediaries (Agents) are perfectly informed regarding project types and can recommend that their clients (Principals) either proceed or discontinue a project. Intermediaries earn revenues only when they recommend proceeding with the transaction. Thus, our design captures some of the incentives faced by financial advisers in commercial banks, where compensation depends on sales performance, and also by money-managers, whose income depends on the size of their portfolios. We find that a monopolist intermediary protects the interest of clients better than when intermediaries compete. Our results are robust to a significant fee increase and provide additional evidence on the impact of market structure on individual incentives and equilibrium outcomes.
Subject Experimental Economics
Keyword(s) Conflict of interests
Deception
Delegated portfolio management
Laboratory experiment
Market design
Rating services
DOI - identifier 10.1016/j.jfi.2017.09.001
Copyright notice © 2017 Elsevier Inc. All rights reserved.
ISSN 1042-9573
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