TY - JOUR AU - Bolton,Patrick AU - Freixas,Xavier AU - Shapiro,Joel TI - Conflicts of Interest, Information Provision, and Competition in Banking JF - National Bureau of Economic Research Working Paper Series VL - No. 10571 PY - 2004 Y2 - June 2004 UR - http://www.nber.org/papers/w10571 L1 - http://www.nber.org/papers/w10571.pdf N1 - Author contact info: Patrick Bolton Columbia Business School 804 Uris Hall New York, NY 10027 Tel: 212/854-9245 Fax: 212/854-8059 E-Mail: pb2208@columbia.edu Xavier Freixas Universitat Pompeu Fabra Department of Economics and Business Ramon Trias Fargas, 25-27 08005 Barcelona Spain E-Mail: xavier.freixas@upf.edu Joel Shapiro Saïd Business School, U. of Oxford Park End Street Oxford OX1 1HP United Kingdom E-Mail: Joel.Shapiro@sbs.ox.ac.uk AB - In some markets, such as the market for drugs or for financial services, sellers have better information than buyers regarding the matching between the buyer's needs and the good's actual characteristics. Depending on the market structure, this may lead to conflicts of interest and/or the under-provision of information by the seller. This paper studies this issue in the market for financial services. The analysis presents a new model of competition between banks, as banks' price competition influences the ensuing incentives for truthful information revelation. We compare two different firm structures, specialized banking, where financial institutions provide a unique financial product, and one-stop banking, where a financial institution is able to provide several financial products which are horizontally differentiated. We show first that, although conflicts of interest may prevent information disclosure under monopoly, competition forces full information provision for sufficiently high reputation costs. Second, in the presence of market power, one-stop banks will use information strategically to increase product differentiation and therefore will always provide reliable information and charge higher prices than specialized banks, thus providing a new reason for the creation of one-stop banks. Finally, we show that, if independent financial advisers are able to provide reliable information, this increases product differentiation and therefore market power, so that it is in the interest of financial intermediaries to promote external independent financial advice. ER -