The compensation model commonly used in financial investment consulting works on a commission basis. The advice is free, but investors often lose money because financial advisors recommend suboptimal products through which they earn higher commissions. How could an alter-native fee payment by the investor be designed to ensure the best advice? Researchers at the Jena Max-Planck-Institute of Economics find that the combination of a preliminary fee and a subsequent voluntary bonus payment will lead to the most honest advice.
The market for retail financial products (e.g., investment funds or insurances) is marred by information asymmetries. Clients are not well informed about the quality of these products. They have to rely on the recommendations of advisors. Incentives of advisors and clients may not be aligned, when fees are used by financial institutions to steer advice. Tobias Regner, MPI of Economics, Jena, and his colleague Vera Angelova (now TU Berlin) experimentally investigate whether voluntary contract components can reduce the conflict of interest and increase truth telling of advisors. They compare a voluntary payment upfront, an obligatory payment upfront, a voluntary bonus afterwards, and a three-stage design with a voluntary payment upfront and a bonus after. Advisors are most truthful, when mutual opportunities to reciprocate exist, and when the voluntary payment is largest. The analysis identifies the third stage bonus payment as the key feature for success as it allows for an interplay of reciprocal behavior between clients and advisors.
Vera Angelova & Tobias Regner, "Do voluntary payments to advisors improve the quality of financial advice? An experimental deception game", Journal of Economic Behavior and Organization
Dr. Martin Binder and Dr. Christian Schubert received their postdoctoral lecture qualification in Economics (habilitation) from the Economics and Business Administration Faculty of Jena's Friedrich Schiller University. In public lectures, Binder and Schubert informed about their research projects "Wirtschaftlicher Wandel und menschliches Wohlergehen" respectively "Preference Change and Welfare." Both researchers are alumni of the Evolutionary Economics Group, Director Prof. Dr. Ulrich Witt.
The Max Planck Institute of Economics and the Friedrich Schiller University in Jena share the peer reviewed joint research paper series Jena Economic Research Papers (JERP). JERP provides research papers of both institutions in electronic form under www.jenecon.de. The latest addition from our Institute: "Providing negative cost public projects under a fair mechanism: An experimental analysis" by Werner Güth, Anastasios Koukoumelis, M. Vittoria Levati and Matteo Ploner.
Papers on Economics & Evolution
The Evolutionary Economics Group edits the "Papers on Economics & Evolution", a series with a 20-year-long tradition. Several renowned economists have contributed, including K. Binmore, R. Day, N. Foss, J. Foster, B. Loasby, S. Metcalfe, J. Mokyr, R. Nelson, E. Ostrom and S. Winter. Issues back to 2004 can be downloaded here. The most recent addition: C. M. Baum: "Mass-Produced Food: the Rise and Fall of the Promise of Health and Safety".