Faculty of Economics and Business Administration Publications Database

Competition through Commissions and Kickbacks

Ottaviani, Marco
Volume: 102
Number: 2
Pages: 780 - 809
Month: April
ISSN-Print: 0002-8282
Link External Source: Online Version
Year: 2012
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.