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Dynamic quality signaling with hidden actions

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  • Dilmé, Francesc

Abstract

A seller owns a firm and privately knows its underlying value. She can exert a costly hidden effort over time to affect a noisy signal. Arriving competitive buyers use the history of signals to infer the value of the firm and make price offers. We show that the degree of efficiency of sending highly-informative signals plays a crucial role in shaping how information is transmitted. If exerting a high signaling effort is efficient, the seller of a high-value firm responds to bad luck by increasing the level of effort and, with a high probability, she sells the firm at a high price. In contrast, when high signaling effort is inefficient, the seller stops exerting signaling effort when buyers become pessimistic about the value of the firm, and she sells it at a low price or retains it for herself. In both cases, the equilibrium effort level is inefficiently low.

Suggested Citation

  • Dilmé, Francesc, 2019. "Dynamic quality signaling with hidden actions," Games and Economic Behavior, Elsevier, vol. 113(C), pages 116-136.
    • Handle: RePEc:eee:gamebe:v:113:y:2019:i:c:p:116-136
    DOI: 10.1016/j.geb.2018.07.010
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    Cited by:

    1. Raphael Boleslavsky, 2023. "Waiting for Fake News," Papers 2304.04053, arXiv.org, revised Apr 2023.
    2. Heinsalu, Sander, 2017. "Good signals gone bad: Dynamic signalling with switched effort levels," Journal of Mathematical Economics, Elsevier, vol. 73(C), pages 132-141.

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    More about this item

    Keywords

    Dynamic signaling; Dynamic moral hazard; Endogenous effort;
    All these keywords.

    JEL classification:

    • 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
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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