Agency Contracts with Long-Term Customer Relationships
Ignatius J. Horstmann
In certain industries, sales agent contracts include provisions for sales commissions and clawbacks of commissions if clients are not retained. We show that contracts with these features arise in environments having up-front selling costs recouped from ongoing sales; heterogeneous customers; limited agent access to capital markets; and imperfect commitment to long-term contracts. We test the model using information on insurance sales agent contracts from New Zealand prior to and after bank entry into insurance sales. The evidence indicates that banks cream-skimmed customers. We predict that this should reduce the values of sales commissions and clawbacks. The data support this prediction.
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