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

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.