Cashing-In Credibility

This paper studies a dynamic communication game in which the seller of an asset, whose credibility is unknown to the market, reports changes in the asset value during multiple periods before selling the asset. We characterize the strategy by which the seller exploits his credibility over time to maximize the asset’s terminal price. Though the asset value is iid across periods, and its distribution is continuous, the equilibrium has a simple Markov structure that depends on a single state variable: the seller’s cumulative report. The possibility of misreporting generates reports that are serially dependent, even when the shocks are independent across periods. In equilibrium, prices are relatively insensitive to good news, particularly in the last period. The seller’s cumulative report tends to grow over time, while the seller’s credibility tends to decrease slowly. The seller is able to maintain inflated prices for as long as necessary. Furthermore, the terminal price explodes as the seller’s horizon grows large.