Contracts to Sell Information (Revision of 12-85)

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 reliability problem when information is sold since anyone can claim to have superior knowledge. Optimal strategies which allow the seller to overcome this problem are considered in the context of a standard one-period two-asset model. It is shown that when the seller’s risk aversion is unobservable, an information market exists and both the seller and buyers are better off. However, because of the reliability problem the seller cannot obtain the full value of 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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