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

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  • Anton Suvorov

    () (CEFIR, NES)

  • Natalia Tsybuleva

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.

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Bibliographic Info

Paper provided by Center for Economic and Financial Research (CEFIR) in its series Working Papers with number w0121.

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Length: 41 pages
Date of creation: Oct 2008
Date of revision:
Handle: RePEc:cfr:cefirw:w0121

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  1. Joseph Farrell and Robert Gibbons., 1988. "Cheap Talk Can Matter in Bargaining," Economics Working Papers 8863, University of California at Berkeley.
  2. Myerson, Roger B, 1983. "Mechanism Design by an Informed Principal," Econometrica, Econometric Society, vol. 51(6), pages 1767-97, November.
  3. Vasiliki Skreta, 2007. "On the Informed Seller Problem: Optimal Information Disclosure," Levine's Bibliography 843644000000000222, UCLA Department of Economics.
  4. Avinash Dixit, 2003. "On Modes of Economic Governance," Econometrica, Econometric Society, vol. 71(2), pages 449-481, March.
  5. Seidmann, Daniel J., 1990. "Effective cheap talk with conflicting interests," Journal of Economic Theory, Elsevier, vol. 50(2), pages 445-458, April.
  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. Vasiliki Skreta, 2007. "On the Informed Seller Problem: Optimal Information Disclosure," Levine's Bibliography 122247000000001789, UCLA Department of Economics.
  9. 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.
  10. 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.
  11. 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.
  12. Rochet, Jean-Charles & Tirole, Jean, 2006. "Two-Sided Markets: A Progress Report," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
  13. V. Crawford & J. Sobel, 2010. "Strategic Information Transmission," Levine's Working Paper Archive 544, David K. Levine.
  14. 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.
  15. Jullien, Bruno & Mariotti, Thomas, 2002. "Auction and the Informed Seller Problem," IDEI Working Papers 145, Institut d'Économie Industrielle (IDEI), Toulouse, revised Oct 2004.
  16. Roland Strausz, . "Honest Certification and the Threat of Capture," Papers 018, Departmental Working Papers.
  17. 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.
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