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

The paper investigates credibility of the intermediarys advice in a bilateral trade model. A seller and a buyer with private and indepen-dent 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 buyers valuation and reveals some information to the seller. We \u85rst show that if the broker gets a \u85xed fee for each executed transaction, he can transmit his information credibly via cheap talk. Full information revelation can be sustained even when the intermediarys information about the buyer becomes arbitrarily precise. The transmission of information by the broker in-creases ex ante welfare of the seller and the broker, but has ambiguous impact on the buyer. If the intermediary observes signals about valu-ations of both participants, the fully revealing equilibrium exists only under certain restrictions on parameters of the model. Another limit to e ¢ cient communication can be imposed by competition between in-termediaries. We then consider the mechanism design problem for an informed intermediary, and prove that choosing an appropriate system of two-part tari¤s allows the intermediary to secure the same payo¤ as in the optimal direct mechanism. 1