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The Price of Free Advice
[journal article]
Abstract What factors determine how well consumers make their actual choices with regard to financial products? This paper empirically evaluates two different choices consumers make when buying deferred annuities. One choice concerns the type of insurance policy, the other concerns the choice of insurance pr... view more
What factors determine how well consumers make their actual choices with regard to financial products? This paper empirically evaluates two different choices consumers make when buying deferred annuities. One choice concerns the type of insurance policy, the other concerns the choice of insurance provider. For both choices we will analyse what factors explain the quality of the choice made. In particular, we will investigate the role of financial advice in the decision making process. By combining consumer survey data and data on quotations by life insurance companies, we obtain the following results. First, respondents who buy their policy directly from an insurer attain a significantly better match between their risk preferences and the type of policy chosen than respondents who purchase their policy through an insurance broker. Second, respondents who buy their policy through an insurance broker obtain a significantly lower pay-out than respondents who purchased their policy directly from an insurance company. These results raise doubts about the functioning of both the market for financial advice and the market for life insurances.... view less
Document language
English
Publication Year
2008
Page/Pages
p. 1889-1903
Journal
Applied Economics, 40 (2008) 14
DOI
https://doi.org/10.1080/00036840600905274
Status
Postprint; peer reviewed
Licence
PEER Licence Agreement (applicable only to documents from PEER project)