Dynamic signaling with stochastic stakes

Sebastian Gryglewicz () and Aaron Kolb ()
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Sebastian Gryglewicz: Erasmus School of Economics, Erasmus University Rotterdam
Aaron Kolb: Department of Business Economics and Public Policy, Indiana University Kelley School of Business

Theoretical Economics, 2022, vol. 17, issue 2

Abstract: We study dynamic signaling in a game of stochastic stakes. Each period, a privately informed agent of binary type chooses whether to continue receiving a return that is an increasing function of both her reputation and an exogenous public stakes variable or to irreversibly exit the game. A strong type has a dominant strategy to continue. In the unique perfect Bayesian equilibrium, the weak type plays a mixed strategy that depends only on current stakes and their historical minimum, and she builds a reputation by continuing when the stakes reach a new minimum. We discuss applications to corporate reputation management, online vendor reputation, and limit pricing with stochastic demand.

Keywords: Dynamic signaling; reputation building; history dependence; exit dynamics (search for similar items in EconPapers)
JEL-codes: C73 D82 D83 (search for similar items in EconPapers)
Date: 2022-05-05
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