Integrative Social Contract Theory and Institutional Brokerage Commission Rebates


This paper provides an Integrative Social Contract Theory analysis of the ethics of institutional brokerage commission rebates - soft dollars and directed brokerage - focused on transaction cost economics. Brokerage commission rebates are a form of vertical arrangement subject to the same economic analysis scholars and courts have used in the Antitrust setting to find that consumers often benefit from vertical arrangements. My analysis shows that institutional brokerage rebates, often condemned as kickbacks, payola, or commercial bribery, likely benefit mutual fund investors once the problem of brokerage quality assurance is recognized. According to Integrative Social Contract Theory they appear to be ethical forms of economic organization.