Dynamic Signaling with Dropout Risk
Forthcoming at American Economic Journal: Microeconomics
34 Pages Posted: 8 Nov 2014 Last revised: 6 Feb 2015
Date Written: November 9, 2014
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: Suggested Citation