Footnote:
In: Journal of Finance, Forthcoming
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments August 27, 2018 erstellt
Description:
I study how brokers distort household investment decisions. Using a novel convertible bond dataset, I find that consumers often purchase dominated bonds - cheap and expensive of otherwise identical bonds coexist in the market. Brokers are incentivized to sell the inferior bonds, earning two-times greater fees for selling dominated bonds on average. I develop and estimate a broker intermediated search model that rationalizes this behavior and quantifies the distortions in these markets. In the model consumer search is endogenously directed according to the incentives of brokers and brokers price discriminate based on a consumer's level of sophistication. The model estimates indicate that costly search is a key friction in retail financial markets, but the effects of search costs are compounded when brokers are incentivized to direct the search of consumers towards high fee inferior products