Delegated Cheap Talk : A Theory of Investment Banking

We study the role of investment banking as delegated cheap talk. Two agents in our model have conflicting interests: a seller simply wants to sell his business, whereas a buyer wants to invest in a good business. We find that no direct talk between the two is informative. However, the seller can influence the buyer by contracting with an intermediary and delegating the communication. Any successful contract requires the intermediary to share the risk of loss with the buyer. A seller-optimal contract maximizes the intermediary's bias in favor of the seller while maintaining minimal alignment with the buyer's incentives