Information Design in Bilateral Trade and (Unintended) Welfare Loss

This paper studies the impact of third-party information design on bilateral trade. A seller sets the price of a product and makes a take-it-or-leave-it oer to a buyer. A third-party information designer, who maximizes a weighted social welfare, observes the seller's pricing strategy and designs the information structure of a signal about the value of the product. The buyer observes the price, the information structure and the signal realization and decides whether to purchase the product. I characterize the set of equilibria and show that, due to the strategic interaction between the seller and the designer, third-party information design can cause a Pareto inferior outcome despite the designer's aim to maximize a weighted social welfare.