Dynamic moral hazard and stopping
Journal of the European Economic Association
We propose a simple model of optimal stopping where the economic environment changes as a result of learning. A primary application of our framework is the problem of how optimally to sell an asset, when the demand for that asset is initially uncertain. In the model that we consider, the seller learns about the arrival rate of buyers to the market. As time passes without a sale, the seller becomes more pessimistic about the arrival rate. When the seller does not observe the arrival of a buyer to the market, the rate at which the seller revises her beliefs is affected by the price she sets. We show that learning then leads to a higher posted price by the seller. When the seller does observe the arrival of buyers, she sets an even higher price.
Author's pre-print draft. Final version published by Wiley; available online at http://onlinelibrary.wiley.com/