Signaling

14.12 Game Theory

Muhamet Yildiz

Road map
1. Signaling games review
1. Pooling equilibrium
2. Separating equilibrium
3. Mixed
2. Job-market signaling (short, time permitting)

3. Review
4. Evaluations

Signaling Games

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Signaling Game -- Definition

Two Players: (S)ender, (R)eceiver
1. Nature selects a type ti from T = {t1,,tI}
with probability p(ti);
2. Sender observes ti, and then chooses a
message mj from M = {m1,,mI};
3. Receiver observes mj (but not ti), and then
chooses an action ak from A = {a1,,aK};
4. Payoffs are US(ti,mj,ak) and UR(ti,mj,ak).

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Types of Equilibria
A pooling equilibrium is an equilibrium in
which all types of sender send the same
message.
A separating equilibrium is an equilibrium in
which all types of sender send different
messages.
A partially separating/pooling equilibrium is
an equilibrium in which some types of sender
send the same message, while some others
sends some other messages.

A Pooling equilibrium

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A Separating equilibrium

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A Mixed equilibrium
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A Mixed equilibrium
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2 p =.5 ont .5 q=1/9

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Job Market Signaling

Model
A worker
with ability t = H or t = L (his private information)
Pr(t = H) = q,
obtains an observable education level e,
incurring cost c(t,e) where c(H,e) < c(L,e), and
finds a job with wage w(e), where he
produces y(t,e).

Firms compete for the worker: in equilibrium,

w(e) = (H|e)y(H,e) + (1 (H|e))y(L,e).

Equilibrium
(eH, eL, w(e), (H|e)) where
et = argmaxe w(e) c(t,e) for each t;
w(e) = (H|e)y(H,e) + (1 (H|e))y(L,e);
(H|e) =

qPr(eH = e)

qPr(eH = e) + (1-q)Pr(eL = e)
whenever well-defined.

If t were common knowledge

w

)
w (e

e)
,
t
(
y

e*(t)

No need to imitate
, e)
H
(
y

,e)
L
(
y

e*(L)

e*(H)

No need to imitate

w(.)

e)
,
y (H

,e)
L
(
y

e*(L)

e*(H)

want to imitate
w

, e)
H
(
y

,e)
L
(
y

e*(L) e*(H)

A pooling equilibrium
w

, e)
H
y(
qy(

H ,e

(
q) y
1
+(

)
L ,e

,e)
L
(
y

e*(L) e*(H)

A separating equilibrium
w

, e)
H
(
y

,e)
L
(
y

eL=e*(L)

e*(H)

eH

10

An intuitive separating equilibrium

w

e)
,
y (H

,e)
L
(
y

eL=e*(L)

eH

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