ARTICLE IN PRESS Journal of Economic Theory ( ) – www.elsevier.com/locate/jet Dynamic signaling and market breakdown Ilan Kremer ∗ , Andrzej Skrzypacz Graduate School of Business, Stanford University, Stanford, CA 94305, USA Received 1 April 2004; final version received 12 August 2005 Abstract 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. © 2005 Elsevier Inc. All rights reserved. JEL classification: C73; C78; D82 Keywords: Dynamic; Signaling; Screening; Bargaining 1. Introduction Many real-world markets, such as labor markets and financial markets, feature a privately informed seller who faces a pool of uninformed buyers. A growing literature, starting with Spence’s [12,13] seminal work on education, explores how the seller can signal his type in this wide range of markets. In Spence’s original work, education is modeled as a static choice, so that a more able seller/worker could commit to more ‘units’ of education. In practice, many markets are dynamic and often the signaling variable is the time to agreement. Moreover, commitment is rare, so agents make a new decision in every period; in particular, the seller can quit signaling at any time. This lack of commitment is likely to disturb signaling, as pointed out by Weiss [16], Admati and Perry [1], and Swinkels [14]. In this paper, we follow the above literature in examining a fully dynamic game (à la Swinkels [14]), but incorporate another important feature of many markets, the release of external ∗ Corresponding author. E-mail addresses: ikremer@stanford.edu (I. Kremer), andy@gsb.stanford.edu (A. Skrzypacz). 0022-0531/$ - see front matter © 2005 Elsevier Inc. All rights reserved. doi:10.1016/j.jet.2005.08.004