Ratings, certifications and grades: dynamic signaling and market breakdown
AbstractWe 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.
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Bibliographic InfoPaper provided by UCLA Department of Economics in its series Theory workshop papers with number 121473000000000010.
Date of creation: 26 Apr 2004
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Other versions of this item:
- Skrzypacz, Andrzej & Kremer, Ilan, 2005. "Ratings, Certifications and Grades: Dynamic Signaling and Market Breakdown," Research Papers 1814r2, Stanford University, Graduate School of Business.
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-02-23 (All new papers)
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