Ratings, Certifications and Grades: Dynamic Signaling and Market Breakdown

Andrzej Skrzypacz and Ilan Kremer
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Ilan Kremer: ?

Research Papers from Stanford University, Graduate School of Business

Abstract: We consider the effect a public revelation of information (e.g. rating, grade) has on signaling and trading in a dynamic model. Competing buyers offer prices to a privately informed seller who can reject these offers and delay trade. This delay is costly and the seller has no commitment to the duration of the delay. We show how the external public information allows for signaling in equilibrium. More interestingly, we characterize the dynamics of trade and prices. If the signal is not fully revealing, then there is no trade just before the revelation of external information. A lemons market develops endogenously over time and prevents any trade close to the release of the public announcement. On the other hand, if the external signal is fully revealing, then trade occurs even close to the final period; however, in this case there is a discontinuity in prices.

JEL-codes: C73 (search for similar items in EconPapers)
Date: 2005-05
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Working Paper: Ratings, certifications and grades: dynamic signaling and market breakdown (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:1814r2

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