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Dynamic Signaling with Dropout Risk

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  • Francesc Dilmé
  • Fei Li

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)

Suggested Citation

  • Francesc Dilmé & Fei Li, 2016. "Dynamic Signaling with Dropout Risk," American Economic Journal: Microeconomics, American Economic Association, vol. 8(1), pages 57-82, February.
    • Handle: RePEc:aea:aejmic:v:8:y:2016:i:1:p:57-82
    Note: DOI: 10.1257/mic.20120112
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    References listed on IDEAS

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    Cited by:

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    3. Thomas, Caroline, 2019. "Experimentation with reputation concerns – Dynamic signalling with changing types," Journal of Economic Theory, Elsevier, vol. 179(C), pages 366-415.

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    More about this item

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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