When Liability Is Not Enough: Regulating Bonus Payments in Markets with Advice

• 成果类型: Article
• 署名作者: Honda, Jun; Inderst, Roman; Ottaviani, Marco
• 署名单位: Goethe University Frankfurt; Bocconi University
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.2023.4750
• 发表日期: 2024
• 关键词: markets with advice; nonlinear incentives and bonus payments; biased recommendations; liability; regulation

摘要

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.