Messengers, Gatekeepers and Speakers: The Power of Intermediaries in Contracting

In many settings, principals must use intermediaries to extract information from agents. For example, international organizations use NGOs or local leaders to acquire information about agents’ preferences in developing countries, exporting firms employ local agent to obtain information about local market conditions, legislatures ask local representatives to report the preferences of the members of their constituency. In order to study the power of intermediaries in these different settings, this paper sets up a three-tier contracting model with a principal who chooses a policy, an intermediary and a agent who has a private valuation for the policy. We compare three levels of commitment for the intermediary: no commitment, partial commitment where she can condition her contract with the agent on her participation to the principal’s contract, and full commitment where she can condition her contract with the agent on her message to the principal. In the case of a pure intermediary, who does not care about the principal’s decision (or alternatively has a public valuation for this decision), we prove equivalence of full and partial commitment in a linear model, fully characterize the contracts in the two settings, and discuss conditions under which the principal prefers either form of commitment. In the case where the intermediary has private valuation over the decision, we show that the equivalence result for linear cases fails, and provide a partial characterization of the optimal contracts. JEL Classification Numbers: H41, H70, D82, D78, 020