MIDDLEMEN AS GUARANTORS OF QUALITY

We analyze an experience good model with producer moral hazard which is based on Shapiro (Quarterly Journal of Economics, 1983, 98, 659-679). We develop conditions under which a good will be sold through a middleman instead of being sold directly by the producer when selling costs may even be increased by the presence of middlemen. Middlemen help to alleviate the producer moral hazard problem by dropping a producer's good, and lowering her future sales, if the good is not of its claimed quality. The middleman engages in this policing activity in order to maintain his own reputation as a seller of high quality goods.