Advice by an Informed Intermediary: Can You Trust Your Broker?

Anton Suvorov and Natalia Tsybuleva

No w0121, Working Papers from Center for Economic and Financial Research (CEFIR)

Abstract: The paper investigates credibility of the intermediary's advice in a bilateral trade model. A seller and a buyer with private and independent uniformly distributed valuations exchange a unit of good. Their trade is mediated by an intermediary, who at the pre-bargaining stage observes a coarse signal about the buyer's valuation and reveals some information to the seller. We first show that if the broker gets a fixed fee for each executed transaction, he can transmit his information credibly via cheap talk. Full information revelation can be sustained even when the intermediary's information about the buyer becomes arbitrarily precise. The transmission of information by the broker increases ex ante welfare of the seller and the broker, but has ambiguous impact on the buyer. If the intermediary observes signals about valuations of both participants, the fully revealing equilibrium exists only under certain restrictions on parameters of the model. Another limit to effcient communication can be imposed by competition between intermediaries. We then consider the mechanism design problem for an informed intermediary, and prove that choosing an appropriate system of two-part tariffs allows the intermediary to secure the same payoff as in the optimal direct mechanism.

Pages: 41 pages
Date: 2008-10
New Economics Papers: this item is included in nep-cta and nep-mst
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http://www.cefir.ru/papers/WP121.pdf (application/pdf)

Related works:
Journal Article: Advice by an Informed Intermediary: Can You Trust Your Broker? (2010)
Working Paper: Advice by an Informed Intermediary: Can You Trust Your Broker? (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:cfr:cefirw:w0121

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