Middlemen: the good, the bad, and the ugly

Gary Biglaiser and Fei Li ()

RAND Journal of Economics, 2018, vol. 49, issue 1, 3-22

Abstract: We examine the role of a middleman as an expert in markets. A seller's effort determines the quality of the good. Buyers observe neither the seller's effort nor the good's quality. A middleman, after observing a signal about the good's quality, decides whether to purchase it and then to sell it. We show that the presence of a middleman may either reduce or exacerbate the seller's moral hazard problem. We also consider a model with multiple middlemen. We find that the seller's effort is minimized if either the middleman's signal is perfect or the number of middlemen is large.

Date: 2018
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https://doi.org/10.1111/1756-2171.12216

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