Roman Inderst, Marco Ottaviani, Apr 01, 2010
Economists have long been interested in the performance of markets with imperfect information—and in the role of intermediation services in bridging the information gap between product providers and customers. Still, the classic information-economics framework for studying markets may fail to account for another role through which advice can affect market efficiency. Customers may suffer from “behavioral biases” in how they process information and make decisions. Thus, it is natural to ask whether advisors help households make better decisions or whether they, instead, exploit the biases and naiÌˆveteÌ of their customers.
In this article we present some of the reasons why markets with advice may malfunction, and explore the potential rationales for some of the policy proposals that are on the table. We focus on the role of mandatory disclosure policies, the regulation of cancellation terms for service contracts (and refund policies for products), the imposition of liability standards for product providers and intermediaries, and the outright regulation of the size and structure of commissions.