Regulating Markets with Advice : An Experimental Study

We present a newly designed market experiment to study regulatory issues in markets with advice inspired by the models of Inderst and Ottaviani (2012a) and Inderst (2015). In line with our predictions, our experimental markets create conflicts of interest and unsuitable advice biased toward high-commission products. We examine whether two frequently discussed regulation measures -- disclosure and fines for unsuitable advice -- reduce commission payments and improve advice. None of the regulation measures result in lower commissions and more suitable advice, however, and advice is equally biased in all treatments. Furthermore, with disclosure, conflicts of interest are enlarged, offsetting the potentially restraining effects of disclosure. The potential impact of various behavioral factors is discussed to encourage further research