Contracts to Sell Information (Revised: 6-87)

Franklin Allen

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: There is often a moral hazard when information is sold since anyone can claim to have superior information. This paper considers feasible and optimal strategies which allow this problem to be overcome, in the context of a standard one-period, two-asset model. It is shown that it is always better for informed people to sell their information rather than to just use it for speculation. However, because of the moral hazard problem the seller cannot obtain the full returns to his information. This provides an incentive for intermediation since an intermediary may be able to capture some of the remaining returns.

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