Slowing Learning Down

Abstract

We investigate the dynamic signaling incentives of an entrepreneur who is willing to sell her firm. The underlying value of the firm is known only to the seller, and potential buyers learn through noisy signals like sales or dividends. Before the firm is sold the entrepreneur decides between efficient management or inefficient but revenue-generating activities, such as secret price cuts, covered loans, etc. We provide a full characterization of the equilibrium set of the model, which is set in discrete time and with infinite horizon. We find that, in all equilibria, when the underlying value is high, the entrepreneur efficiently manages her firm. When, instead, the underlying value is low, the entrepreneur keeps switching between efficient managing and inefficient signaling in order to slow down the learning about the value, and therefore increasing the probability of receiving a high offer. By mapping our model into a reputations model, we show that reputation may be a permanent phenomenon even under imperfect monitoring, and it can be sustained without building-milking reputation phases.

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