We introduce a model of advice in which firms steer advisors through nonlinear incentive schemes. In addition to developing an isomorphism to pricing with mixed bundling, we obtain three main insights. First, firms optimally use nonlinear bonuses to economize on the rent paid to advisors. Second, equilibrium bonus payments induce advisors to make biased recommendations that are artificially contingent on each other, resulting in an inefficient allocation. Third, if advisor liability is stepped up, firms respond by increasing the size of the bonus, leaving advisor bias unchanged. These results shed light on prevailing compensation practices for advisors and support direct regulatory interference.
When liability is not enough: regulating bonus payments in markets with advice
Ottaviani, Marco
2024
Abstract
We introduce a model of advice in which firms steer advisors through nonlinear incentive schemes. In addition to developing an isomorphism to pricing with mixed bundling, we obtain three main insights. First, firms optimally use nonlinear bonuses to economize on the rent paid to advisors. Second, equilibrium bonus payments induce advisors to make biased recommendations that are artificially contingent on each other, resulting in an inefficient allocation. Third, if advisor liability is stepped up, firms respond by increasing the size of the bonus, leaving advisor bias unchanged. These results shed light on prevailing compensation practices for advisors and support direct regulatory interference.File | Dimensione | Formato | |
---|---|---|---|
bonus.pdf
non disponibili
Descrizione: articolo
Tipologia:
Pdf editoriale (Publisher's layout)
Licenza:
Copyright dell'editore
Dimensione
2.07 MB
Formato
Adobe PDF
|
2.07 MB | Adobe PDF | Visualizza/Apri |
I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.