Information Disclosure by Informed Intermediary in Double Auction

Abstract

Abstract In this paper, I study the role of an informed intermediary in improving market efficiency through communication with a buyer and a seller. Based on a double auction setting, I introduce an agent who is partially informed about the private information of a buyer and a seller. The agent can disclose information to either both parties, one party, or none of them. I compare the two most common incentives of the agent, maximizing either trade probability or expected price, in information disclosure. The analysis shows that the former incentive improves efficiency more than the latter; the agent with the former always discloses all relevant information, resulting in not only a higher trade probability but also a higher expected price. The buyer and the seller mostly prefer the agent disclosing information to both parties. When the agent discloses information to only one party, the buyer and the seller desire to be the one who receives the information exclusively. They sometimes prefer the agent disclosing information exclusively to the other party over no information for all. The findings of this paper have important implications for the design of compensation schemes for intermediaries who play a significant role as advisors to market participants.