Weak and Strong Signals |
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Authors: | John G Riley |
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Institution: | University of California, Los Angeles, USA |
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Abstract: | 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 |
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Keywords: | adverse selection screening signaling asymmetric information signaling threshold |
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