MIDDLEMEN AS GUARANTORS OF QUALITY

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