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

  • Anton Suvorov

    ()

    (CEFIR, NES)

  • Natalia Tsybuleva

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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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. Vasiliki Skreta, 2008. "On the Informed Seller Problem: Optimal Information Disclosure," Working Papers 08-10, New York University, Leonard N. Stern School of Business, Department of Economics.
  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. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-51, November.
  4. Roger B. Myerson, 1981. "Mechanism Design by an Informed Principal," Discussion Papers 481, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. 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.
  6. Jullien, Bruno & Mariotti, Thomas, 2002. "Auction and the Informed Seller Problem," IDEI Working Papers 145, Institut d'Économie Industrielle (IDEI), Toulouse, revised Oct 2004.
  7. Avinash Dixit, 2001. "On Modes of Economic Governance," CESifo Working Paper Series 589, CESifo Group Munich.
  8. Farrell, Joseph & Gibbons, Robert, 1989. "Cheap talk can matter in bargaining," Journal of Economic Theory, Elsevier, vol. 48(1), pages 221-237, June.
  9. Seidmann, Daniel J., 1990. "Effective cheap talk with conflicting interests," Journal of Economic Theory, Elsevier, vol. 50(2), pages 445-458, April.
  10. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
  11. Kathryn Graddy & Orley Ashenfelter, 2002. "Auctions and the Price of Art," Economics Series Working Papers 131, University of Oxford, Department of Economics.
  12. 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.
  13. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
  14. 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.
  15. 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.
  16. 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.
  17. 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.
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