Competition through Commissions and Kickbacks
Roman Inderst, Marco Ottaviani
American Economic Review · 2012 · Volume 102 · Issue 2
Abstract
In markets for retail financial products and health services, consumers often rely on the advice of intermediaries to decide which specialized offering best fits their needs. Product providers, in turn, compete to influence the intermediaries' advice through hidden kickbacks or disclosed commissions. Motivated by the controversial role of these widespread practices, we formulate a model to analyze competition through commissions from a positive and normative standpoint. The model highlights the role of commissions in making the advisor responsive to supply-side incentives. We characterize situations when commonly adopted policies such as mandatory disclosure and caps on commissions have unintended welfare consequences. (JEL D21, D82, D83, G21, L15, L25)
Keywords
Firm Behavior: Theory, Asymmetric and Private Information, Search, Learning, Information and Knowledge, Communication, Belief, Banks, Other Depository Institutions, Micro Finance Institutions, Mortgages, Information and Product Quality, Standardization and Compatibility, Firm Performance: Size, Diversification, and Scope
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