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Middlemen: The Good, the Bad, and the Ugly

33 Pages Posted: 10 Nov 2016 Last revised: 19 Sep 2017

Gary Biglaiser

University of North Carolina

Fei Li

University of North Carolina (UNC) at Chapel Hill

Date Written: May 17, 2017

Abstract

This paper examines the role of a middleman as an expert in markets with asymmetric information. A seller has one unit of an indivisible good whose quality is determined by his effort. Buyers observe neither the seller's effort nor the quality of the good. A middleman, after observing a signal about the quality of the good, decides whether to purchase it and then to sell it to buyers. We show that the presence of a middleman may either reduce or exacerbate the seller's moral hazard problem. We also consider the 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.

Keywords: Middleman, Dealer, Adverse Selection, Moral Hazard, Expert, Hold-Up

JEL Classification: D82, D83, L15

Suggested Citation

Biglaiser, Gary and Li, Fei, Middlemen: The Good, the Bad, and the Ugly (May 17, 2017). Available at SSRN: https://ssrn.com/abstract=2866744 or http://dx.doi.org/10.2139/ssrn.2866744

Gary Biglaiser

University of North Carolina ( email )

Chapel Hill, NC 27599
United States
919-966-4884 (Phone)
919-966-4986 (Fax)

Fei Li (Contact Author)

University of North Carolina (UNC) at Chapel Hill ( email )

102 Ridge Road
Chapel Hill, NC NC 27514
United States

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