Selling Information to Competitive Firms∗

Internal agency conflicts distort firms’ choices and reduce social welfare. To limit these distortions, principals dealing with privately informed agents often acquire information from specialized intermediaries, such as auditing and certification companies, that are able to ascertain, and credibly disclose, agents’private information. We study how the structures of both the information provision and the final good markets affect information accuracy. A monopolistic information provider may supply imprecise information to perfectly competitive firms, even if the precision of this information can be increased at no cost. This is due to a price effect of information: while more accurate information reduces agency costs and allows firms to increase production, it also results in a lower price in the final good market, which reduces principals’willingness to pay for information. The result hinges on the assumption that firms are competitive and it exacerbates when principals can coordinate vis-à-vis the information provider. In an imperfectly competitive information market, providers may restrict information by not selling to some of the principals. JEL Classification: D40, D82, D83, L11.