Informational hold up and intermediaries

Why do some incomplete information markets feature intermediaries while others do not? I study the allocation of two goods in an incomplete information setting with a single principal, multiple agents with unit demand, and interdependent valuations. I construct a novel dynamic mechanism implemented by a principal who faces a set of intermediaries, each of whom represents an ex ante identical set of agents. This mechanism has a unique (up to permutation) weak perfect Bayesian equilibrium. The dynamic mechanism is inefficient with positive probability. Nevertheless, under mild conditions the agents are ex ante better off under the dynamic mechanism relative to a Vickrey-like auction because the intermediaries are more able to exploit information asymmetries in the dynamic mechanism than agents are able to exploit information asymmetries in the Vickrey-like auction. Finally, I show that in large markets the dynamic mechanism and Vickrey-like auction have the same expected total surplus. The comparison between the two mechanisms gives a stylized intuition for the hierarchical structure of larger markets and institutions.