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

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  • Suvorov Anton

    ()
    (New Economic School)

  • Tsybuleva Natalia

    ()
    (The Centre for Economic and Financial Research)

Abstract

The paper investigates the credibility of an intermediary's advice in a bilateral trade model. A seller and a buyer with private and independent valuations exchange a unit of good. Trade is mediated by an intermediary, who observes a coarse signal about the buyer's valuation and may reveal it to the seller before bargaining. We show that if the broker gets a fixed per-transaction fee, he can fully transmit information via cheap talk. This information transmission increases ex ante welfare of the seller and the broker but has an ambiguous impact on the buyer. We show that limits to informative communication may arise if the intermediary observes signals about valuations of both participants or because of competition between intermediaries. Finally, using mechanism design approach, we show that choosing an appropriate system of two-part tariffs allows the intermediary to secure the same expected profit as in the optimal direct mechanism.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.

Volume (Year): 10 (2010)
Issue (Month): 1 (November)
Pages: 1-35

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Handle: RePEc:bpj:bejtec:v:10:y:2010:i:1:n:50

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  1. Roger B. Myerson, 1981. "Mechanism Design by an Informed Principal," Discussion Papers 481, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Steven A. Matthews & Andrew Postlewaite, 1987. "Pre-Play Communication in Two-Person Sealed-Bid Double Auctions," Discussion Papers 744R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Strausz, Roland, 2004. "Honest Certification and the Threat of Capture," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 25, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  4. Vasiliki Skreta, 2007. "On the Informed Seller Problem: Optimal Information Disclosure," Levine's Bibliography 843644000000000222, UCLA Department of Economics.
  5. Roger B. Myerson & Mark A. Satterthwaite, 1981. "Efficient Mechanisms for Bilateral Trading," Discussion Papers 469S, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Baron, David P, 1982. " A Model of the Demand for Investment Banking Advising and Distribution Services for New Issues," Journal of Finance, American Finance Association, vol. 37(4), pages 955-76, September.
  7. Orley Ashenfelter & Kathryn Graddy, 2003. "Auctions and the Price of Art," Journal of Economic Literature, American Economic Association, vol. 41(3), pages 763-787, September.
  8. Avinash Dixit, 2001. "On Modes of Economic Governance," CESifo Working Paper Series 589, CESifo Group Munich.
  9. Jullien, B. & Mariotti, T., 2006. "Auction and the informed seller problem," Games and Economic Behavior, Elsevier, vol. 56(2), pages 225-258, August.
  10. Eloïc Peyrache & Lucía Quesada, 2011. "Intermediaries, Credibility and Incentives to Collude," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(4), pages 1099-1133, December.
  11. V. Crawford & J. Sobel, 2010. "Strategic Information Transmission," Levine's Working Paper Archive 544, David K. Levine.
  12. Farrell, Joseph & Gibbons, Robert, 1988. "Cheap Talk Can Matter in Bargaining," Department of Economics, Working Paper Series qt3qz786xq, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  13. Nick Feltovich & Richmond Harbaugh & Ted To, 2002. "Too Cool for School? Signalling and Countersignalling," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 630-649, Winter.
  14. Baron, David P & Holmstrom, Bengt, 1980. " The Investment Banking Contract for New Issues under Asymmetric Information: Delegation and the Incentive Problem," Journal of Finance, American Finance Association, vol. 35(5), pages 1115-38, December.
  15. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
  16. Thomas Miceli & Katherine A. Pancak & C. F. Sirmans, 2000. "Restructuring Agency Relationships in the Real Estate Brokerage Industry: An Economic Analysis," Journal of Real Estate Research, American Real Estate Society, vol. 20(1), pages 31-47.
  17. Seidmann, Daniel J., 1990. "Effective cheap talk with conflicting interests," Journal of Economic Theory, Elsevier, vol. 50(2), pages 445-458, April.
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