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Weak and Strong Signals
Author(s) -
Riley John G.
Publication year - 2002
Publication title -
scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/1467-9442.00281
Subject(s) - economics , information asymmetry , microeconomics , marginal cost , sorting , signaling game , asymmetry , nash equilibrium , quality (philosophy) , mathematical economics , computer science , philosophy , physics , epistemology , quantum mechanics , programming language
Akerlof, Spence and Stiglitz showed that competitive markets can perform very poorly in the presence of informational asymmetry. In this paper I show that if there is a signaling technology which is sufficiently strong (i.e., the marginal cost of signaling declines sufficiently rapidly with quality) the cost of sorting is low and a Nash equilibrium exists. Empirically testable necessary and sufficient conditions for existence are derived. I further show that if Akerlovian participation constraints are added to a signaling model there is a minimum signaling threshold. Finally I argue that these conclusions hold regardless of whether it is the uninformed or informed agents who move first. JEL classification : D 8