IDEAS home Printed from https://ideas.repec.org/p/ecl/stabus/1814r2.html
   My bibliography  Save this paper

Ratings, Certifications and Grades: Dynamic Signaling and Market Breakdown

Author

Listed:
  • Skrzypacz, Andrzej

    (Stanford U)

  • Kremer, Ilan

Abstract

We 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.

Suggested Citation

  • Skrzypacz, Andrzej & Kremer, Ilan, 2005. "Ratings, Certifications and Grades: Dynamic Signaling and Market Breakdown," Research Papers 1814r2, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:1814r2
    as

    Download full text from publisher

    File URL: http://gsbapps.stanford.edu/researchpapers/library/RP1814R2.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Georg Noldeke & Eric van Damme, 1990. "Signalling in a Dynamic Labour Market," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(1), pages 1-23.
    2. Jeroen M. Swinkels, 1999. "Education Signalling with Preemptive Offers," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(4), pages 949-970.
    3. Kohlberg, Elon & Mertens, Jean-Francois, 1986. "On the Strategic Stability of Equilibria," Econometrica, Econometric Society, vol. 54(5), pages 1003-1037, September.
    4. 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(3), pages 397-417, September.
    5. Teoh, Siew Hong & Hwang, Chuan Yang, 1991. "Nondisclosure and Adverse Disclosure as Signals of Firm Value," The Review of Financial Studies, Society for Financial Studies, vol. 4(2), pages 283-313.
    6. 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.
    7. Weiss, Andrew, 1983. "A Sorting-cum-Learning Model of Education," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 420-442, June.
    8. Korajczyk, Robert A & Lucas, Deborah J & McDonald, Robert L, 1991. "The Effect of Information Releases on the Pricing and Timing of Equity Issues," The Review of Financial Studies, Society for Financial Studies, vol. 4(4), pages 685-708.
    9. Anat R. Admati & Motty Perry, 1987. "Strategic Delay in Bargaining," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(3), pages 345-364.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kremer, Ilan & Skrzypacz, Andrzej, 2007. "Dynamic signaling and market breakdown," Journal of Economic Theory, Elsevier, vol. 133(1), pages 58-82, March.
    2. Brendan Daley & Brett Green, 2012. "Waiting for News in the Market for Lemons," Econometrica, Econometric Society, vol. 80(4), pages 1433-1504, July.
    3. Heinsalu, Sander, 2017. "Good signals gone bad: Dynamic signalling with switched effort levels," Journal of Mathematical Economics, Elsevier, vol. 73(C), pages 132-141.
    4. Francesc Dilme & Fei Li, 2013. "Dynamic Education Signaling with Dropout Risk, Third Version," PIER Working Paper Archive 14-014, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 24 Apr 2014.
    5. Sander Heinsalu, 2017. "Good signals gone bad: dynamic signalling with switching efforts," Papers 1707.04699, arXiv.org.
    6. Francesc Dilme & Fei Li:, 2012. "Dynamic Education Signaling with Dropout, Second Version," PIER Working Paper Archive 13-048, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 03 Sep 2013.
    7. Daley, Brendan & Green, Brett, 2014. "Market signaling with grades," Journal of Economic Theory, Elsevier, vol. 151(C), pages 114-145.
    8. Starkov, Egor, 2023. "Only time will tell: Credible dynamic signaling," Journal of Mathematical Economics, Elsevier, vol. 109(C).
    9. Francesc Dilme & Fei Li, 2012. "Dynamic Education Signaling with Dropout," PIER Working Paper Archive 12-023, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    10. Soeren Johansen & Anders Rygh Swensen, 2021. "Adjustment coefficients and exact rational expectations in cointegrated vector autoregressive models," Discussion Papers 21-07, University of Copenhagen. Department of Economics.
    11. Kim, Kyungmin, 2017. "Information about sellers' past behavior in the market for lemons," Journal of Economic Theory, Elsevier, vol. 169(C), pages 365-399.
    12. Francesc Dilmé & Fei Li, 2016. "Dynamic Signaling with Dropout Risk," American Economic Journal: Microeconomics, American Economic Association, vol. 8(1), pages 57-82, February.
    13. Ivan Anic & Vladimir Bozin & Branko Uroševic, 2016. "A Signaling Model of University Selection," CESifo Working Paper Series 5741, CESifo.
    14. Dilmé, Francesc, 2019. "Dynamic quality signaling with hidden actions," Games and Economic Behavior, Elsevier, vol. 113(C), pages 116-136.
    15. Srihari Govindan & Robert Wilson, 2009. "On Forward Induction," Econometrica, Econometric Society, vol. 77(1), pages 1-28, January.
    16. Flavio Toxvaerd, 2017. "Dynamic limit pricing," RAND Journal of Economics, RAND Corporation, vol. 48(1), pages 281-306, March.
    17. Kim-Sau Chung & Peter Eso, 2007. "Signalling with Career Concerns," Discussion Papers 1443, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    18. John Becker-Blease & Afshad Irani, 2008. "Do corporate governance attributes affect adverse selection costs? Evidence from seasoned equity offerings," Review of Quantitative Finance and Accounting, Springer, vol. 30(3), pages 281-296, April.
    19. Cyrus Aghamolla & Carlos Corona & Ronghuo Zheng, 2021. "No reliance on guidance: counter‐signaling in management forecasts," RAND Journal of Economics, RAND Corporation, vol. 52(1), pages 207-245, March.
    20. Kaya, Ayça & Liu, Qingmin, 2015. "Transparency and price formation," Theoretical Economics, Econometric Society, vol. 10(2), May.

    More about this item

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecl:stabus:1814r2. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/gsstaus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.