Financial Intermediaries and Agency Problems With and Without Vertical Incentives
65 Pages Posted: 9 Apr 2021
Date Written: March 9, 2021
Abstract
I study agency problems between brokers and investors in the retail bond market. The
presence of suitability or fiduciary regulations, which govern transactions in this setting, can
lead to tensions for brokers between maximizing their own profit and acting in the best interests
of their customers. This paper measures the degree to which these conflicting incentives
influence brokers by examining the U.S. reverse convertible bond market. While brokers do
consider the profits of investors when making decisions, I estimate that their own profits are
roughly three times more important, suggesting the existence of severe agency problems that
reduce consumer welfare.
Keywords: agency problems; vertical incentives; brokers; intermediaries; consumer finance; structured products
JEL Classification: D12, D14, D18, G21, G24, G28, L14, L42, M52
Suggested Citation: Suggested Citation