Dynamic quality signaling with hidden actions

Francesc Dilme

Games and Economic Behavior, 2019, vol. 113, issue C, 116-136

Abstract: A seller owns a firm and privately knows its underlying value. She can exert a costly hidden effort over time to affect a noisy signal. Arriving competitive buyers use the history of signals to infer the value of the firm and make price offers. We show that the degree of efficiency of sending highly-informative signals plays a crucial role in shaping how information is transmitted. If exerting a high signaling effort is efficient, the seller of a high-value firm responds to bad luck by increasing the level of effort and, with a high probability, she sells the firm at a high price. In contrast, when high signaling effort is inefficient, the seller stops exerting signaling effort when buyers become pessimistic about the value of the firm, and she sells it at a low price or retains it for herself. In both cases, the equilibrium effort level is inefficiently low.

Keywords: Dynamic signaling; Dynamic moral hazard; Endogenous effort (search for similar items in EconPapers)
JEL-codes: C73 D82 D83 J24 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Dynamic Quality Signaling with Hidden Actions (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:113:y:2019:i:c:p:116-136

DOI: 10.1016/j.geb.2018.07.010

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