Project in detail

Do Smarter Consumers Get Better Advice? An Analytical Framework and Evidence from German Private Pensions

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The existing theoretical and empirical literature considers expert advice to be a substitute for a consumer’s information: More informed consumers should ignore the advice given to them, but the advisor does not (or cannot) take this into account. We show in a simple analytical framework that higher signals of consumer information should indeed lead advisors to provide better services. The model also suggests an identification strategy, i.e. to focus on consumers with bad signals (proxied by low education and being female) but high financial literacy and vice versa. To verify our main hypotheses, we choose a two-pronged approach using data from the SAVE-panel. First we show that individuals with higher financial literacy are more likely to solicit financial advice. Conditional on financial advice those with lower signals and high actual levels of financial literacy are less likely to follow it, on average. Then, we turn to data on the market for subsidized private pension plans in Germany. The data is uniquely suited to our investigation, as we observe whether consumers buy a contract with the firm employing their financial advisor. We show that individuals are strongly influenced by their source of advice – with dependent and independent financial advisors steering customers towards choice options yielding higher kickbacks. We finally demonstrate that individuals with higher financial literacy are less susceptible to this effect. This is a joint project with Johannes Koenen (ifo). The discussion paper has been presented at various conferences. A revised version is currently submitted for publication.

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