Dynamic Signaling and Market Breakdown

Dynamic Signaling and Market Breakdown

By
Ilan Kremer, Andrzej Skrzypacz
Journal of Economic Theory. March
2007, Vol. 133, Issue 1, Pages 58-82

We consider the effects a public revelation of information (e.g. rating, grade) has on trading in a dynamic signaling model. Competing buyers offer prices to a privately informed seller who can reject them and delay trade. Delay is costly and the seller has no commitment to its duration. The external public information allows for signaling in equilibrium. More interestingly, we characterize the dynamics of trade and prices. If signals are noisy, no trade takes place just before the revelation of external information. If signals are fully revealing, then trade occurs even close to revelation, however, transaction prices are discontinuous.