The Market for Information Intermediaries and Its Effects

Consider an agent that wants to sell an asset. The agent has only soft

partial information about the value of the asset, but he has the option of

hiring the services of an appraiser. Once hired, the appraiser finds out the

real value of the asset and provides an appraisal that the agent can later

voluntarily use in his interaction with a buyer. In the main model we are

analyzing, the seller’s utility from holding on to an asset with common

value v is v while the buyer’s utility is v + X. In this adverse selection

environment we show that if the price of the appraiser’s service is above

X, the market for the asset can collapse entirely as a result of the existence

of the appraiser in the market. To be precise, we show that markets that

function reasonably well in the absence of appraisers can become totally

dysfunctional in response to the entry of an appraiser into the market. We

also demonstrate that even if the market does not collapse the appraiser

can only harm the efficiency of the market and in some cases can even

reduce the utility of the seller from an ex-post perspective.