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Nonlinear Incentives and Advisor Bias

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  • Honda, Jun
  • Inderst, Roman

Abstract

We analyze firms' competition to steer an advisor's recommendations through potentially non-linear incentives. Even when firms are symmetric, so that the overall size of compensation would not distort advice when incentives were linear, advice is biased when firms are allowed to make compensation nonlinear, which they optimally do. Policies that target an advisor's liability are largely ineffective, as firms react to such increased liability by making incentives even steeper, increasing bonus payments while reducing the linear (commission) part at the same time. This observation may justify policymakers' direct interference with firms' compensation practice, as frequently observed notably in consumer finance.

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  • Honda, Jun & Inderst, Roman, 2017. "Nonlinear Incentives and Advisor Bias," EconStor Preprints 253657, ZBW - Leibniz Information Centre for Economics.
    • Handle: RePEc:zbw:esprep:253657
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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