American Economic Review: Vol. 102 No. 2 (April 2012)


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Competition through Commissions and Kickbacks

Article Citation

Inderst, Roman, and Marco Ottaviani. 2012. "Competition through Commissions and Kickbacks." American Economic Review, 102(2): 780-809.

DOI: 10.1257/aer.102.2.780


In markets for retail financial products and health services, consumers often rely on the advice of intermediaries to decide which specialized offering best fits their needs. Product providers, in turn, compete to influence the intermediaries' advice through hidden kickbacks or disclosed commissions. Motivated by the controversial role of these widespread practices, we formulate a model to analyze competition through commissions from a positive and normative standpoint. The model highlights the role of commissions in making the advisor responsive to supply-side incentives. We characterize situations when commonly adopted policies such as mandatory disclosure and caps on commissions have unintended welfare consequences. (JEL D21, D82, D83, G21, L15, L25)

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Inderst, Roman (Johann Wolfgang Goethe U Frankfurt and Imperial College U)
Ottaviani, Marco (Northwestern U)

JEL Classifications

D21: Firm Behavior: Theory
D82: Asymmetric and Private Information
D83: Search; Learning; Information and Knowledge; Communication; Belief
G21: Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
L15: Information and Product Quality; Standardization and Compatibility
L25: Firm Performance: Size, Diversification, and Scope

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