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.
2024
2023
Honda, Jun; Inderst, Roman; Ottaviani, Marco
File in questo prodotto:
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.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11565/4062202
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus 0
  • ???jsp.display-item.citation.isi??? 0
social impact