Book contents
- Frontmatter
- Contents
- Preface
- Acknowledgments
- I Imperfect Competition
- II Risk, Stochastic Dominance, and Risk Aversion
- III Incomplete Information and Incentives
- 7 Matching: The Marriage Problem*
- 8 Auctions
- 9 Hidden Information and Adverse Selection
- 10 Hidden Information and Signaling
- 11 Hidden Action and Moral Hazard
- 12 Rank-Order Tournaments
- IV Technical Supplements
- Bibliography
- Index
10 - Hidden Information and Signaling
Published online by Cambridge University Press: 20 January 2010
- Frontmatter
- Contents
- Preface
- Acknowledgments
- I Imperfect Competition
- II Risk, Stochastic Dominance, and Risk Aversion
- III Incomplete Information and Incentives
- 7 Matching: The Marriage Problem*
- 8 Auctions
- 9 Hidden Information and Adverse Selection
- 10 Hidden Information and Signaling
- 11 Hidden Action and Moral Hazard
- 12 Rank-Order Tournaments
- IV Technical Supplements
- Bibliography
- Index
Summary
He's a sheep in sheep's clothing.
Winston Churchill on AttleeOh, what a tangled web we weave,
When first we practice to deceive!
Sir Walter ScottIntroduction
Another market response to the problems of adverse selection is signaling. Here, the informed party makes a first move and attempts to reveal his or her private information by signaling his or her type. Regarding the labor-market application, we allow workers to signal their productivity with their educational achievements.
Signaling is also widespread outside the realm of education. For example, a joint stock company may issue debt instruments in lieu of equity in order to indicate to potential shareholders that the market underestimates its future earnings. Similarly, a firm may engage in costly advertising just in order to tell its customers or rivals that it is not a fly-by-night outfit. Or a monopolist may choose a high-cost product supply – despite forgone monopoly profits – just in order to warn potential entrants that they face a low-cost supplier (see Milgrom and Roberts (1982a, 1982b)). In animal populations, high-quality males may advertise their quality by displaying handicaps, such as a longer tail or brighter plumage, that make it more difficult to survive.
In the following, we consider one particular signaling model, Spence's (1973) justly famous job-market signaling, and we state it explicitly as a noncooperative game. As it turns out, the analysis requires the employment of several advances in game theory.
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- Chapter
- Information
- Topics in MicroeconomicsIndustrial Organization, Auctions, and Incentives, pp. 267 - 277Publisher: Cambridge University PressPrint publication year: 1999