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

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  • Rud, Olga A.
  • Rabanal, Jean Paul
  • Horowitz, John

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.

Suggested Citation

  • Rud, Olga A. & Rabanal, Jean Paul & Horowitz, John, 2018. "Does competition aggravate moral hazard? A Multi-Principal-Agent experiment," Journal of Financial Intermediation, Elsevier, vol. 33(C), pages 115-121.
    • Handle: RePEc:eee:jfinin:v:33:y:2018:i:c:p:115-121
    DOI: 10.1016/j.jfi.2017.09.001
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    2. Attallah, May & Abildtrup, Jens & Stenger, Anne, 2022. "Non-monetary incentives for sustainable biomass harvest: An experimental approach," Resource and Energy Economics, Elsevier, vol. 69(C).
    3. Kling, Luisa & König-Kersting, Christian & Trautmann, Stefan T., 2023. "Investment preferences and risk perception: Financial agents versus clients," Journal of Banking & Finance, Elsevier, vol. 154(C).
    4. Kevin Davis, 2019. "The Hayne Royal Commission and financial sector misbehaviour: Lasting change or temporary fix?," The Economic and Labour Relations Review, , vol. 30(2), pages 200-221, June.
    5. Holzmeister, Felix & Holmén, Martin & Kirchler, Michael & Stefan, Matthias & Wengström, Erik, 2019. "Delegated Decision-Making in Finance," OSF Preprints 3umdf, Center for Open Science.
    6. José Manuel Mansilla-Fernández, 2020. "Non-Performing loans, financial stability, and banking competition: evidence for listed and non-listed Eurozone banks," Hacienda Pública Española / Review of Public Economics, IEF, vol. 232(1), pages 29-52, March.
    7. Gelman, Michael & Khan, Zaheer & Shoham, Amir & Tarba, Shlomo Y., 2021. "Does local competition and firm market power affect investment adviser misconduct?," Journal of Corporate Finance, Elsevier, vol. 66(C).
    8. Angerer, Martin & Herrmann-Romero, Matthias & Szymczak, Wiebke, 2022. "Losing funds or losing face? Reputation and accountability in the credit rating industry," Journal of Economic Dynamics and Control, Elsevier, vol. 143(C).
    9. Mol, Jantsje M. & Botzen, W. J. Wouter & Blasch, Julia E., 2020. "Risk reduction in compulsory disaster insurance: Experimental evidence on moral hazard and financial incentives," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 84(C).
    10. Kling, Luisa & König-Kersting, Christian & Trautmann, Stefan T., 2019. "Investment Preferences and Risk Perception: Financial Agents versus Clients," Working Papers 0674, University of Heidelberg, Department of Economics.
    11. Song, Fenghua & Thakor, Anjan V., 2019. "Bank culture," Journal of Financial Intermediation, Elsevier, vol. 39(C), pages 59-79.

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    More about this item

    Keywords

    Delegated portfolio management; Conflict of interests; Rating services; Market design; Deception; Laboratory experiment;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General

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