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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by UCLA Department of Economics in its series Theory workshop papers with number 121473000000000010.
Date of creation: 26 Apr 2004
Date of revision:
Contact details of provider:
Web page: http://www.dklevine.com/
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)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kohlberg, Elon & Mertens, Jean-Francois, 1986.
"On the Strategic Stability of Equilibria,"
Econometric Society, vol. 54(5), pages 1003-37, September.
- E. Kohlberg & J.-F. Mertens, 1998. "On the Strategic Stability of Equilibria," Levine's Working Paper Archive 445, David K. Levine.
- KOHLBERG, Elon & MERTENS, Jean-François, . "On the strategic stability of equilibria," CORE Discussion Papers RP -716, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Korajczyk, Robert A. & Lucas, Deborah J. & McDonald, Robert L., 1992. "Equity Issues with Time-Varying Asymmetric Information," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(03), pages 397-417, September.
- Korajczyk, Robert A & Lucas, Deborah J & McDonald, Robert L, 1991. "The Effect of Information Releases on the Pricing and Timing of Equity Issues," Review of Financial Studies, Society for Financial Studies, vol. 4(4), pages 685-708.
- Nick Feltovich & Richmond Harbaugh & Ted To, 2002. "Too Cool for School? Signalling and Countersignalling," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 630-649, Winter.
- Weiss, Andrew, 1983. "A Sorting-cum-Learning Model of Education," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 420-42, June.
- Admati, Anat R & Perry, Motty, 1987. "Strategic Delay in Bargaining," Review of Economic Studies, Wiley Blackwell, vol. 54(3), pages 345-64, July.
- Noldecke,Georg & van Damme,Eric, 1988.
"Signalling in a dynamic labor market,"
Discussion Paper Serie A
148, University of Bonn, Germany.
- Jeroen M. Swinkels, 1997.
"Education Signaling with Preemptive Offers,"
1175, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Teoh, Siew Hong & Hwang, Chuan Yang, 1991. "Nondisclosure and Adverse Disclosure as Signals of Firm Value," Review of Financial Studies, Society for Financial Studies, vol. 4(2), pages 283-313.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (David K. Levine).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.