Centre for Economic Policy Research

General discussion
David Lipton thought that the Report should adopt a more sophisticated analysis
of the economics of information. It asserts with justification that the gathering of
information is central for economies of scope, but it does not assess where 
information is gathered within businesses, what its costs are and what its value is.
We must distinguish between the economics of information gathering and the
economics of what information is gathered and distributed by analysts. Are 
analysts a valuable form of information gathering within financial institutions? 
Avinash Persaud, who thought that the discussion was too soft on investment
banks, made three comments. First, we need to distinguish between retail and
institutional investors. It is possible that the latter ignore the buy and sell 
recommendations but still read the contents of the prospectus. This content is not
disconnected from the recommendations. If the industry is only getting one side,
it is difficult for investors to make an unbiased conclusion. In the end, the retail
investors were fooled, especially in the last three months of the bubble when they
were the main buyers. Second, will the quality of research decline as a 
consequence of lower compensation? If the market as a whole reduces analysts’
compensation, it should not affect the quality of research. There will, however,
probably be less research provided by investment banks, mostly because of
unbundling. Finally, Persaud argued in favour of more separation. As an example,
independent analysts often self-censor themselves because the cost of being
wrong is massive.
Hans-Jörg Rudloff agreed that anyone who believes that research in an 
investment bank would have the opportunity to write negative reports about that
bank’s customers is not living in the real world. The Glass-Steagall Act may not
have been so detrimental as we thought until recently.
Charles Freedman commented on the trade-off between economies of scope
and conflicts of interest. The Report provides little justification for economies of
scope and the economic literature leaves their importance as an open question.
The Report should pay more attention to economies of scope on which its 
conclusions crucially depend.
Eugene White agreed that it remains difficult to identify economies of scope, as
well as economies of scale. A key part of the problem lies in the lack of economic
88 Conflicts of Interest in the Financial Services Industry

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data. Yet, practitioners and, perhaps more convincingly, investors think that there
are sizeable benefits to be reaped from economies of scope. Moreover, retail
investors weighted disproportionately on the policy response.