Mediation Markets: The Case of Soft Information

Abstract

This paper proposes a theoretical framework that combines information design and mechanism design to analyze markets for mediation services between an informed and an uninformed party. The mediator receives compensation from the informed party and must rely on information that is voluntarily reported. We describe all the outcomes that can be induced via a mediation contract, and compare the optimal outcomes when the mediator has the bargaining power (i.e., monopolistic mediation) with those when the informed party has it. The main finding is that mediation contracts often reveal more information with a monopolistic mediator because they give up some information rents to retain incentive compatibility. Unlike the conventional logic of quality under-provision for physical goods, here the attempt to capture information rents can lead to increased information disclosure. These findings shed light on the controversial matter of whether a monopolistic market for information intermediaries, such as rating agencies for financial securities, is more or less desirable than a competitive one.