Dynamic moral hazard and stopping
Mason, Robin; Valimaki, Juuso
Date: 13 February 2013
Journal
Journal of the European Economic Association
Publisher
Wiley-Blackwell
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Abstract
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 ...
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.
Economics
Faculty of Environment, Science and Economy
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