Dynamic Signaling with Dropout Risk

Francesc Dilme and Fei Li ()

American Economic Journal: Microeconomics, 2016, vol. 8, issue 1, 57-82

Abstract: We study the role of dropout risk in dynamic signaling. A seller privately knows the quality of an indivisible good and decides when to trade. In each period, he may draw a dropout shock that forces him to trade immediately. To avoid costly delay, the seller with a low-quality good voluntarily pools with early dropouts, implying that the expected quality of the good increases over time. We characterize the time-varying equilibrium trading dynamics. It is demonstrated that the maximum equilibrium delay of trade is decreasing in the initial belief that the good is of high quality. (JEL C73, D82, D83)

JEL-codes: C73 D82 D83 (search for similar items in EconPapers)
Date: 2016
Note: DOI: 10.1257/mic.20120112
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Citations: View citations in EconPapers (6)

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