Dynamic Signaling with Dropout Risk

Forthcoming at American Economic Journal: Microeconomics

34 Pages Posted: 8 Nov 2014 Last revised: 6 Feb 2015

See all articles by Francesc Dilme

Francesc Dilme

University of Bonn

Fei Li

University of North Carolina (UNC) at Chapel Hill

Date Written: November 9, 2014

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.

Keywords: Dynamic Games, Dynamic Signaling, Dropout Risk

JEL Classification: D83, J31

Suggested Citation

Dilme, Francesc and Li, Fei, Dynamic Signaling with Dropout Risk (November 9, 2014). Forthcoming at American Economic Journal: Microeconomics, Available at SSRN: https://ssrn.com/abstract=2520270 or http://dx.doi.org/10.2139/ssrn.2520270

Francesc Dilme (Contact Author)

University of Bonn ( email )

Lennestrasse 35
53113 Bonn
Germany
0049228737957 (Phone)

Fei Li

University of North Carolina (UNC) at Chapel Hill ( email )

102 Ridge Road
Chapel Hill, NC NC 27514
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
94
Abstract Views
683
rank
341,576
PlumX Metrics