Adverse Selection and the Market for Retail Financial Services
Financial services comprise the entire range of services offered by financial firms and markets. This includes investment advice, investment trusts, and products such as unit-linked pension plans. The informational structure of these markets is relatively uncomplicated, since clients or the consumers are at a clear informational advantage to the provider, meaning that it is reasonable to characterize these markets in terms of exogenous information. This chapter develops a simple model of adverse selection in the market for basic retail financial services. It also covers the case for self-regulation in financial services and involves questions on how the government can improve on this solution. It is, however, discussed in terms of the British system, which is now a unified system of regulation. The chapter also includes discussions on the international dimension and financial regulation in the European Union.
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