TY  - JOUR
AU  - Carlin,Bruce I.
AU  - Gervais,Simon
TI  - Legal Protection in Retail Financial Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14972
PY  - 2009
Y2  - May 2009
UR  - http://www.nber.org/papers/w14972
L1  - http://www.nber.org/papers/w14972.pdf
N1  - Author contact info:
Bruce I. Carlin
Anderson Graduate School of Management
UCLA
110 Westwood Plaza, Suite C413
Los Angeles, CA 90095-1481
Tel: 310/825-7246
E-Mail: bruce.carlin@anderson.ucla.edu

Simon Gervais
Fuqua School of Business
Duke University
One Towerview Drive
Durham, NC 27708-0120
Tel: 919-660-7683
Fax: 919-660-7990
E-Mail: sgervais@duke.edu
AB  - Given the importance of sound advice in retail financial markets and the fact that financial institutions outsource their advice services, what legal rules maximize social welfare in the market? We address this question by posing a theoretical model of retail markets in which a firm and a broker face a bilateral hidden action problem when they service clients in the market. All participants in the market are rational, and prices are set based on consistent beliefs about equilibrium actions of the firm and the broker. We characterize the optimal law within our modeling context, and derive how the legal system splits the blame between parties to the transaction. We also analyze how complexity in assessing clients and conflicts of interest affect the law. Since these markets are large, the implications of the analysis have great welfare import.
ER  -