We conduct a Multi-Principal-Agent experiment to determine whether market structure affects intermediary behavior. The intermediaries (Agents) are perfectly informed regarding project types and can recommend that Principals either proceed or discontinue with a project. Agents earn revenues only when they recommend to continue. We find that monopolist Agents protect the interests of Principals better than when Agents compete. Our findings are robust to a significant fee increase. The results of our study apply to a number of economic and financial environments (money-managers, rating agencies, etc.) and provide additional evidence on the impact of market structure on individual incentives and equilibrium outcomes.
We study the effect of competition on the conflicts of interest in an issuer-pay model. Our analysis complements the theoretical work of Bolton, Freixas and Shapiro (2012) by introducing an experimental approach that examines the effect of market structure-monopoly and competition-on the incidence of misreporting by rating agencies. In our game, agencies receive a signal regarding the type of asset that the seller holds. The seller does not know the asset type and therefore, asks the rating agency for a report which is either blue (good) or red (bad). The asset, along with the report (if any), is then presented to the buyer for purchase. We find that in the monopoly environment the likelihood of misreporting is almost three times as high as in the more competitive market.
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