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Dynamic signaling with stochastic stakes

Author

Listed:
  • Gryglewicz, Sebastian

    (Erasmus School of Economics, Erasmus University Rotterdam)

  • Kolb, Aaron

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

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.

Suggested Citation

  • Gryglewicz, Sebastian & Kolb, Aaron, 2022. "Dynamic signaling with stochastic stakes," Theoretical Economics, Econometric Society, vol. 17(2), May.
    • Handle: RePEc:the:publsh:3710
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    More about this item

    Keywords

    Dynamic signaling; reputation building; history dependence; exit dynamics;
    All these keywords.

    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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