1

Wojtek Przepiorka and Joël Berger

Signaling Theory Evolving: Signals and Signs of
Trustworthiness in Social Exchange*
Abstract: Signaling theory is concerned with situations of strategic interdependence in which one actor (the sender)
aims at persuading another actor (the receiver) of a fact the receiver does not know or is uncertain about. The unob-
served fact can be a quality of the sender the receiver would like to know and act upon. Signaling theory has been used
to explain individuals’ investments in higher education, advertisement, cultural consumption, aggressive behavior, and
decision-making in social dilemmas. In this chapter, we give an overview of how signaling theory can be used to ex-
plain trust and trustworthiness in social exchange. After restating the core elements of the theory, we discuss conceptu-
al extensions to the basic framework which have proved useful in explaining trust and trustworthiness in social ex-
change. In particular, we show how distinguishing between signaling costs and benefits, signals and signs, and the
production and display of signals and signs can make signaling theory more broadly applicable in sociological scholar-
ship. We illustrate these conceptual extensions with empirical evidence from laboratory experiments. The chapter
concludes with an outlook on future research.

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* Cite as: Przepiorka, Wojtek and Joël Berger. forthcoming. "Signalling Theory Evolving: Signals and Signs of Trustworthiness in Social
Exchange." in Social Dilemmas, Institutions and the Evolution of Cooperation, edited by B. Jann and W. Przepiorka. Berlin: De Gruyter
Oldenbourg.
We would like to thank Diego Gambetta and Ben Jann for helpful comments and suggestions.
2

1 Introduction
Most, if not all, human social interaction takes place under conditions of uncertainty, that is in situations where one,
several or all parties are not fully informed about their interaction partners’ true intentions, preferences and/or con-
straints. Even a social encounter as simple as two pedestrians approaching each other on the sidewalk comprises uncer-
tainty, sometimes causing two strangers engage in a brief “dance” before letting them go on their way. If, as in this
example, actors’ interests overlap (i.e., if X wishes Y to pass on the left, so does Y), communication conveying actors’
preferences and intentions can reduce uncertainty to an extent that benefits all parties (e.g., X prevents collision by
pointing in the direction he or she wants to go). However, in a significant proportion of human social interaction, inter-
acting parties’ interests diverge or even oppose. In such situations mere statements and gestures may not reduce uncer-
tainty, as making one’s counterpart believe one thing to withhold the truth about another can be highly beneficial from
an individual perspective. For example, in situations of conflict when actors fight over a scarce resource, making ad-
versaries believe that one will endure and win a fight may lead them to recognize defeat without challenge. In situa-
tions where trust is at stake, when actors must trust one another to gain but suffer a loss if their trust is abused, making
one’s partner believe one is trustworthy is in one’s best interest, whether honest or not. Statements such as “don’t
bother, I’m stronger than you” or “send me your money, I’m trustworthy” will convince the gullible, but no one with
their head firmly in place. If binding contracts cannot be made and/or fulfilled, is there a way for communication to
solve these social dilemmas? Signaling theory, put forward independently by biologists and economists, addresses this
question.
In biology, the literature on the evolution of animal communication has focused on how a system of “honest” sig-
nals can be sustained once it has evolved (Searcy and Nowicki 2005). With the acknowledgement of the individual-
selectionist approach in evolutionary theory, former arguments that comprehended signaling as a coordination device
in cooperative interactions were discarded. The main argument brought forward by Dawkins and Krebs (1978) was
that deceptive signals benefit individuals not endowed with the qualities that the receiver anticipates based on these
signals. This manipulative interpretation of signaling, however, leads to the conclusion that receivers will eventually
ignore these signals, as they do not entail any benefits for them. Zahavi (1975) offered a way out of the signaling para-
dox by assuming that signals are costly and entail a handicap that only individuals with superior qualities could sus-
tain. The tail of a peacock became the prime example of the so-called handicap principle (Zahavi and Zahavi 1997).
However, not until Grafen (1990) published a formal analysis, showing that costly signals can indeed be evolutionarily
stable, did the handicap principle gain wider recognition among biologists.
In economics, signaling theory was most prominently introduced by Spence (1974), who suggested that educa-
tional attainment operates as a signal in an employer-employee interaction. The assumption inherent to Spence’s mod-
el is that signaling costs are negatively correlated with productivity. Actors with higher productivity are assumed to
have attained a higher degree of education at lower costs in terms of time and effort. Thus, diplomas and degree certif-
icates reduce an employer’s uncertainty regarding a potential employee’s productivity. At about the same time, Nelson
(1974) addressed the question of why producers of experience goods (goods the quality of which cannot be observed
in advance) advertise their products if such advertising cannot add valuable information prior to purchase. He argued
that advertisement increases consumers’ confidence in the product’s quality, because only consumers’ repeated pur-
chases would compensate the producer for the initial expenses on advertisement.
Inspired by contributions in economics and game theory (Cho and Kreps 1987; Frank 1988; Camerer 2003), ra-
tional choice sociologists’ discussion of signaling theory relates to the research on social dilemmas in general and the
research on trust dilemmas in particular (Voss 1998; Bacharach and Gambetta 2001; Raub 2004; Przepiorka and
Diekmann 2013). Signaling theory offers a reliable way to overcome the trust dilemma by answering the following
two questions (see also Bozoyan 2015): (1) How can an actor decide whether another actor can be trusted? (2) How
can an actor establish his or her trustworthiness? In what follows, we review the core elements of the theory by apply-
ing it to the trust dilemma in social exchange. We then discuss conceptual extensions to the basic framework which
have proved useful in explaining trust and trustworthiness in social exchange. Most of these conceptual extensions
have been developed elsewhere; this chapter puts them together and, where necessary, states more precisely the condi-
tions under which they apply.
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2 Trust and trustworthiness in social exchange

Trust dilemmas arise in sequential exchange between a truster (first moving party) and a trustee (second moving party)
if the following five conditions are met: (1) the exchange is not based on a formally binding agreement; (2) a self-
regarding trustee has no incentive to meet the truster’s advance; (3) the truster regrets having made an advance if it
remains unmet by the trustee; (4) both truster and trustee are better off if the trustee meets the truster’s advance than if
no exchange takes place; and (5) the truster is uncertain of whether his or her advance will be met by the trustee
(Coleman 1990: Ch. 5).
In game-theoretic terms, the trust dilemma has been described by means of the trust game (Dasgupta 1988; Kreps
1990).1 The extensive form of the trust game (TG) is represented by the right subtree in Figure 1. In the TG, the truster
(Player 1) moves first and decides whether to make an advance (a) or not (¬a). If the truster decides for the latter, no
exchange takes place and both parties to the interaction merely save the opportunity costs (P) of engaging in an ex-
change with each other. Only if the truster makes an advance does the trustee (Player 2) have a possibility to decide.
The trustee can decide whether to meet the truster’s advance (m) or not (¬m). If the trustee meets the truster’s advance,
the exchange takes place and both the truster and the trustee earn the gains from trade (R > P). However, the trustee
gains more by not meeting the truster’s advance (T > R). Since the trustee is self-regarding, he or she does not meet the
truster’s advance, and the truster earns less than if he or she had not made an advance (S < P).
Note that the TG only fulfils the first four of the five necessary conditions listed above and thus remains an inade-
quate representation of a trust dilemma. Since in the TG, the truster can be certain that the trustee will not meet his or
her advance, the truster will refrain from making an advance and no exchange will take place. A trust dilemma also
requires that the truster is uncertain whether the trustee will meet his or her advance. Only the trust game with incom-
plete information (TGI) meets all five necessary conditions of a trust dilemma (Camerer and Weigelt 1988; Dasgupta
1988; Voss 1998; Bacharach and Gambetta 2001; Buskens 2002; Raub 2004).
The TGI extends the TG as follows (see Figure 1). First, it introduces nature (N) as a player (Harsanyi 1967),
which randomly chooses whether the truster interacts with the trustee in the TG (right subtree in Figure 1) or in the
assurance game (AG, left subtree in Figure 1). The only difference between the TG and the AG is that in the AG, the
trustee has an incentive to meet the truster’s advance because R + b > T – c, where b > 0 and/or c > 0. However, the
truster does not know which of the two games nature has chosen for him or her to interact with the trustee. The truster
only knows that nature chooses the AG with probability α and the TG with probability 1 – α , and this is common
knowledge. Knowing α , the truster thus decides whether or not to make an advance based on his or her expected gains
from either action, that is EU[a] = αR + (1 – α)S and EU[¬a] = P, respectively. The truster makes an advance if EU[a]
> EU[¬a] or, put differently, if the probability α of interacting in the AG is above a certain threshold:

α > (P – S)/(R – S) (1)

The truster refrains from making an advance if the condition specified in equation (1) is not met.

Unlike in the TG, in the AG, the trustee gains an additional benefit (b) from meeting the truster’s advance, and/or
incurs an additional cost (c) from failing to meet the truster’s advance. If the truster makes an advance (a), therefore,
the trustee will meet the advance (m). Before we describe where these additional benefits and costs come from, let us
first define the terms trust, trustworthiness and competence based on the theoretical framework outlined thus far (for
other definitions of trust see, e.g., Hardin 2002; Uslaner 2002; Yamagishi and Yamagishi 1994):

- Trust is a truster’s subjective belief regarding the trustee’s trustworthiness and/or competence, based on
which the truster decides whether or not to make an advance
- Trustworthiness is the trustee’s intention to meet the truster’s advance
- Competence is the trustee’s ability (in terms of skill and knowledge) to meet the truster’s advance

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1 Note that in the behavioral and experimental economics literature, the investment game (Berg, Dickhaut, and McCabe 1995) is often
called a “trust game” (see also Camerer 2003). We will not consider the investment game here. Roughly speaking, the investment game is a
continuous version of the binary trust game described in this chapter. For a critical assessment of the investment game as a representation of
the trust dilemma, see Ermisch and Gambetta (2006).
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Figure 1: The trust game with incomplete information (TGI)

Notes: In the TGI, Nature (N) moves first and determines the game in which the truster (Player 1) interacts with a trustee (Player
2). With probability α the game is an assurance game (AG), in which the trustee is trustworthy, and with probability 1 – α the
game is a trust game (TG), in which the trustee is untrustworthy. The probability α is common knowledge; the truster does not
know in which game he or she is interacting with the trustee, and this is denoted by the dashed line. If the truster makes an
advance (a), a trustworthy trustee meets the advance (m), whereas an untrustworthy trustee does not (¬m). In the first case, the
truster’s payoff is R and the trustee’s payoff is R + b. In the second case, the truster’s payoff is S and the trustee’s payoff is T. If
the truster does not make an advance (¬a), both the truster’s and the trustee’s payoff is P. The payoffs are ordered as follows: T
> R > P > S and R + b > T – c.

For the sake of simplicity, in what follows, we will consider the trust dilemma only as a dilemma in which the
truster’s uncertainty concerns the trustworthiness of the trustee, but not the trustee’s competence (see Raub 2004 on
this point). Following Riegelsberger, Sasse, and McCarthy (2005), we divide a trustee’s additional benefits and costs
from meeting or not meeting the truster’s advance, respectively, in extrinsic (i.e., contextual) and intrinsic (i.e., psy-
chological) benefits and costs. A trustee’s extrinsic benefits and costs result from the trustee’s social and institutional
embeddedness (Buskens and Raub 2013; Diekmann et al. 2014; Hardin 2002; Hume [1740] 1969; Posner 2000; Sosis
2005; Przepiorka 2013; Przepiorka and Diekmann 2013). In these cases it can be rational for a trustee to act trustwor-
thily, as not meeting a truster’s advance can result in not being trusted ever after, and this may be less beneficial than
meeting the truster’s advance and being continuously trusted in the future. For example, electronic reputation systems
in online markets create real (i.e., financial) incentives for anonymous traders to behave in a trustworthy way (e.g.,
Diekmann and Przepiorka forthcoming). This is not to say that online traders have no intrinsic motives for being trust-
worthy. A trustee’s intrinsic benefits and costs result from the trustee’s other-regarding preferences (Bolton and Ock-
enfels 2000; Braun 1992; Fehr and Schmidt 1999; Snijders 1996) and internalized norms of reciprocity and fairness
(Bacharach and Gambetta 2001; Bacharach, Guerra, and Zizzo 2007; Falk and Fischbacher 2006; Voss 1998). For
example, an online trader may derive a psychological benefit from the fact that his or her merchandise will make his or
her trading partner happy and/or feel guilty if, after receiving the money from the trading partner, he or she did not
send the merchandise in return.
In the reminder of this chapter, we take for granted that (1) a proportion α of trustees is motivated by extrinsic
and/or intrinsic benefits and/or costs (henceforth trustworthy-making properties) such that these trustees would meet a
truster’s advance, and (2) that these trustees’ trustworthy-making properties are a priori unobservable. In the next
section, we make use of signaling theory to address the questions of how trustees can convince trusters of their trust-
worthiness, and of how trusters can tell the trustworthy trustees apart from the untrustworthy ones.
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3 Signals of trustworthiness in social exchange

Broadly defined, signals are actors’ actions purposefully taken to change other actors’ beliefs. The main tenets of sig-
naling theory as applied to the trust dilemma are as follows (see also Bliege Bird and Smith 2005). First, actors differ
in their trustworthy-making properties: that is, some actors are trustworthy, and others are less so. Second, these trust-
worthy-making properties are only imperfectly observable or not observable at all. Third, actors benefit from knowing
their interaction partners’ trustworthy-making properties. Finally, under certain conditions, signals allow actors to
convey their trustworthy-making properties and infer the trustworthy-making properties of potential interaction part-
ners.
According to “classical” signaling theory (Spence 1974), a signal is produced strategically by a deliberate act. The
signaler acts anticipating that an observer will interpret his or her act and infer his or her unobservable properties from
it. A signal is informative of the signaler’s unobservable properties if it is type-separating. A signal is type-separating
only if the true bearer of the relevant properties can afford to produce the signal and produces it while someone not
equipped with these properties cannot afford to produce the signal. If all signalers are able to produce a signal and
produce it, the signal does not convey any information about these signalers. Because of the conditions that must ob-
tain for a signal to be type-separating, signaling theory is often called costly signaling theory.
A classic example is the earning of a university degree to signal one’s productivity to potential employers (Spence
1974). An employer may have a good idea of the average productivity of potential employees, but does not know the
productivity of any one applicant. For productive types, acquiring a university degree is associated with a cost s1, and
for unproductive types acquiring a degree is associated with a higher cost s2 > s1. If, conditional on having acquired a
degree, the discounted lifetime income is w irrespective of type, then earning a university degree is a type-separating
signal of productivity if w – s1 > 0 > w – s2. Under these conditions, an employer will know that an applicant with a
degree is productive, whereas an applicant without a degree is not; the employer will therefore hire the former rather
than the latter.
How can we apply (costly) signaling theory to the interaction between a truster and a trustee in the trust dilemma?
Recall first that in the TGI (Figure 1), the trustee in the AG is trustworthy because R + b > T – c, the trustee in the TG
is untrustworthy because T > R, and both types of trustees earn the same (P) if the truster does not make an advance.
The relevant but unobserved property of the trustee that the truster would like to know about is the trustee’s trustwor-
thiness. The TGI can be extended so that the trustee (knowing his or her type) can first decide whether to produce a
signal at a certain cost or not (see, e.g., Przepiorka and Diekmann 2013). Like in the job market example described in
the previous paragraph, let us first assume that, for a trustworthy trustee, producing the signal is associated with a cost
sAG, and for the untrustworthy trustee producing the signal is associated with a higher cost sTG > sAG (the subscripts
correspond to the games in which a trustworthy and untrustworthy trustee, respectively, interact with a truster: see
Figure 1).
For the truster to interpret the trustee’s type based on the signal, the signal must be type-separating: that is, a
trustworthy trustee produces a signal, and an untrustworthy trustee does not. Only then can the truster infer that the
trustee producing the signal is trustworthy and safely make an advance, or abstain from making an advance if no signal
is produced. The signal is type-separating if the trustworthy trustee can afford to send it, while the untrustworthy trus-
tee cannot. That is, if R + b – sAG > P and P > T – sTG, respectively. If, however, R + b – sAG > P and T – sTG > P, then
both types of trustees can afford to produce the signal and may do so, in which case the signal will be uninformative of
type.
Although formally correct, this straightforward application of signaling theory to the trust dilemma in social ex-
change can lead to several misconceptions, which, as we claim, may have hampered the propagation of signaling theo-
ry in the social sciences in general (and in sociological scholarship in particular). These misconceptions are: (1) signal-
ing theory is about signaling costs; (2) to be type-separating, signaling costs must differ across types; (3) signals are
always produced strategically; (4) type-separating signals must be costly.
We will next discuss conceptual extensions to the basic framework which have proved useful in explaining trust
and trustworthiness in social exchange, and which dissolve these four misconceptions about signaling theory. We will
show how distinguishing between signaling costs and benefits helps to dismiss misconceptions (1) and (2), and how
distinguishing between signals, signs, their production and their display helps to contradict misconceptions (3) and (4).
6

4 Extending the signaling theory framework

4.1 Signaling costs and benefits
By assuming that trustworthy and untrustworthy types experience different costs in producing a signal, we restrict
ourselves to signals with production costs that are (causally) related to the property of interest. This relationship is
obvious in the example of university degrees as type-separating signals of a potential employee’s productivity, where
the property of interest (productivity) facilitates the production of the signal (the university degree). In the case of the
trust dilemma, it is not obvious how trustworthiness (as defined above) could facilitate signal production, or what
could signal trustworthiness. We will come back to this point shortly. The general point we want to make here is that a
difference in signaling costs is neither a sufficient nor a necessary condition for a signal to be type-separating; what
matters are the net benefits (Johnstone 1997; Gambetta 2009). Let us make this point explicit with regard to the trust
dilemma by assuming that sTG = sAG = s > 0. Under this assumption, the signal is type-separating if:

R–P+b>s>T–P (2)

That is, what makes the signal type-separating is not the signaling costs alone but the trustworthy trustee’s benefit
(b) from meeting the truster’s advance, which an untrustworthy trustee does not obtain net of the costs. For example,
the trustworthy trustee might be trustworthy because of his or her temporal embeddedness, which makes future interac-
tions with the truster likely and thus making it worthwhile to behave trustworthily in the first encounter. Trustee types
thus differ in the probabilities of meeting the truster again in the future, which are unobservable by the truster (Posner
2000; Przepiorka and Diekmann 2013). Assuming that the truster would not make any further advances if the trustee
did not meet the truster’s first advance, trustees with a high probability of meeting the truster again have a strong in-
centive (b) to be trustworthy from the start, whereas trustees with a low probability of meeting the truster again have
no incentive to be trustworthy (see Przepiorka and Diekmann 2013).
Note that equation (2) implies that c has no bearing on the conditions under which a signal can be type-separating.
If equation (2) does not hold, that is if T – R ≥ b ≥ 0, but c > 0 such that R + b > T – c still holds, there will be trustwor-
thy and untrustworthy trustees, but no type-separating signaling equilibrium can emerge, irrespective of how large s is.
To see this, first recall from above that T > R > P. If s is too large such that the untrustworthy type cannot afford to
send the signal (s > T – P), neither can the trustworthy type afford to send it (s > R + b – P); if s is small enough that
the trustworthy type can afford to send the signal (s < R + b – P), so can the untrustworthy type afford to send it (s < T
– P). Under these conditions, a so-called pooling equilibrium will emerge, in which all trustees behave in the same
way and the truster ignores trustees’ signaling behavior and merely decides according to equation (1).
A noteworthy case is the one in which T – R ≥ b ≥ 0 for some trustworthy trustees, and b > T – R for all other
trustworthy trustees. Under these conditions, a so-called semi-separating signaling equilibrium can emerge, in which
only the trustworthy trustees with b > T – R can afford to send a signal, whereas the other trustworthy trustees cannot
and will therefore be indistinguishable from untrustworthy trustees.
Let us now come back to the case in which untrustworthy trustees have higher costs of producing the signal than
trustworthy trustees. Clearly, this case requires that the costs of signal production are somehow related to the property
of interest (trustworthiness). To establish this relationship, recall our distinction between extrinsic and intrinsic trust-
worthy-making properties. It is hard to think of a relation between extrinsic trustworthy-making properties and costs of
signal production; extrinsic trustworthy-making properties are mainly based on selective incentives which only materi-
alize after the interaction, if at all. However, signals are produced before an interaction takes place. There are many
examples of a relationship between intrinsic trustworthy-making properties and costs of signal production. For exam-
ple, in recent years (experimental) evidence has accumulated which shows that generosity (including charitable giving)
and trustworthiness are correlated (Ashraf, Bohnet, and Piankov 2006; Albert et al. 2007; Chaudhuri and Gangadharan
2007; Blanco, Engelmann, and Normann 2011; Fehrler and Przepiorka 2013; Gambetta and Przepiorka 2014; Gambet-
ta and Székely 2014; Przepiorka and Liebe 2016; but see also Fehrler and Przepiorka 2016, who do not find evidence
for such a correlation). The positive relationship between generosity and trustworthiness can be explained via other-
regarding preferences (see the online appendix to Gambetta and Przepiorka 2014). If we allow actors to derive an
additional (psychological) benefit from both producing the signal by being generous and being trustworthy, then pro-
ducing the signal is less costly for trustworthy types than for untrustworthy types.
Let us denote this additional benefit from producing the signal by being generous with g. For example, giving to
charity (Harbaugh, Mayr, and Burghart 2007) or working as a volunteer at a non-profit organization (Fehrler and
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Kosfeld 2014) could be such signals. In these cases, even if the material costs are the same for all types of trustees, that
is, sTG = sAG = s > 0, it can be the case that sTG > sAG – g. However, recall that a difference in signaling costs is not a
sufficient condition for a signal to be type-separating. For the signal to be type-separating, it must hold that R + b – sAG
+ g > P and P > T – sTG. This can be simplified to:

R–P+b+g>s>T–P (3)

Unlike signals which are equally costly for all types of trustees to produce, b can now also be zero as long as R + b
> T – c, where c > 0. For example, if a trustee would feel guilty for not meeting the truster’s advance (i.e., incurring an
intrinsic cost c) and his or her production of the signal would yield an additional benefit g due to guilt reduction, the
signal can be type-separating as long as R – P + g > s > T – P.2 In other words, guilt could sustain both charitable giv-
ing and trustworthiness.
By making the conceptual distinction between signaling costs and benefits, we have shown that the net benefits
matter for type-separation rather than the costs alone, and that therefore signaling costs do not have to differ across
types to be type-separating. Thus far, however, we have assumed that, to be type-separating, untrustworthy trustees
must not find it worthwhile to produce a signal: it must hold that s > T – P. In the next section, we will show that even
if sTG = sAG = s = 0, as long as g > 0 for trustworthy trustees and g = 0 for untrustworthy trustees, producing the signal
can be type-separating under certain conditions. These conditions are unveiled once we introduce the conceptual dis-
tinction between signals, signs, their production and their display.

4.2 Signals, signs, their production and their display

The conceptual distinction between signals and signs has been developed by Bacharach and Gambetta (2001), Gam-
betta and Hamill (2005), Gambetta (2009), Gambetta and Przepiorka (2014), and is further developed here. Recall our
definition that signals are actors’ actions purposefully taken to change other actors’ beliefs. We define signs as any-
thing in the environment that can change actors’ beliefs, once perceived. For example, if one looks out of the window
and sees dark clouds gathering, one is more likely to believe that it is going to rain; if one overhears someone speaking
with a French accent, one is more likely to believe that this person is French by birth; if one notes a seller’s reputation
score on eBay to be overwhelmingly positive, one is more likely to believe that one can trust this seller with one’s
money. Signs and signals are related in that they affect actors’ beliefs, but they are also related in that signs can be-
come signals, and vice versa. A sign becomes a signal if an actor displays (or hides) the sign for the purpose of chang-
ing another actor’s beliefs. A signal becomes a sign if, once produced by an actor for the purpose of changing another
actor’s beliefs, it remains on display for other reasons.
It seems futile to construct an example in which the sign of gathering dark clouds is turned into a signal, whereas a
French accent or a seller’s reputation score on eBay can more plausibly be exemplified as signs and signals. For exam-
ple, during World War II, French spies hiding their accents when speaking German did so with the purpose of making
their enemies believe they were native Germans; by hiding them, their French accents became signals. Note, however,
that for their German counterparts, hearing someone talking German flawlessly remained a sign, as they of course
would not have sensed that something was being hidden from them on purpose. In peer-to-peer online markets, having
one’s reputation score conspicuously displayed is a standard feature, and concealing one’s reputation score is rarely an
option. Hence, online traders may not think of their and their exchange partners’ reputation scores as being purposeful-
ly displayed, and therefore perceive them as signs rather than signals. However, before their reputation can be dis-
played, online sellers must first build one. Online sellers can build a good reputation by behaving trustworthily when
dealing with buyers to receive positive ratings. If, by building a good reputation, these sellers intend to affect future
buyers’ beliefs about their trustworthiness, their good reputation is a signal they produce. What makes an online sell-
er’s reputation a signal is its purposeful production rather than its automatic display.3 However, an online seller’s good
reputation may be the byproduct of the seller being trustworthy because of his or her intrinsic trustworthy-making

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2 This is in line with the other-regarding preferences model by Fehr and Schmidt (1999), which predicts that actors with a β (“guilt”) pa-
rameter above a certain threshold will both choose a generous split as dictators in a dictator game and meet a truster’s advance as trustees in a
trust game. In other words, dictator game giving can be a type-separating signal of trustworthiness (see Gambetta and Przepiorka 2014).
3 An online seller’s reputation score may not be the best example to clarify the distinction between the production and the display of signs
and signals, because it is produced and automatically displayed at the same time, in which case only production lends itself to purposeful
acts. Maybe a more suitable example are tattoos (see Gambetta 2009:171). Tattoos, denoting gang membership for instance, are produced at
one point in time and can later be purposefully displayed as signals, but also unconsciously displayed as signs.
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properties (e.g., guilt aversion, norm of reciprocity, etc.). In this case, reputation is not produced as a signal but as a
sign, because it is not produced for the purpose of changing a buyer’s beliefs (yet still has the potential to do so).
Whether a seller’s reputation is produced strategically as a signal or naturally as a sign is difficult to determine without
knowing the seller’s intentions at the time of production. Still, actors’ intentions can sometimes be derived from the
context in which production takes place, or actors may have proof of their intentions at the time of production.
The distinction between signals that are produced strategically and signs that are produced naturally opens the
door for signaling theory to be applied to “cheap” actions such as gestures and talk.4 Actions are not always carried out
in anticipation of their future information value; people are not strategic all the time and often produce signs, the “raw
material” of potential signals, with other reasons in mind. The interesting aspect of naturally produced signs is that
they can be reliably informative of type even though their production costs are not type-separating – in fact, their real
production costs can be virtually zero. Simple gestures, which in strategic situations could be easily performed by any
actor, can become informative. If actors do not anticipate the information value of their actions, those who behave
kindly, for example, do so because they are good-hearted and derive an intrinsic benefit g > 0 from it, while those who
are not good-hearted do not derive an intrinsic benefit from being kind (g = 0).
Many acts of kindness have negligible costs and are therefore not mimic-proof (i.e., sTG = sAG = s = 0); yet uncon-
ditional kindness has been found to explain much of the variation in trustworthiness (Ashraf, Bohnet, and Piankov
2006). So how could “cheap” acts of kindness function as type-separating signals of trustworthiness? This question
cannot be answered with regard to sign production by means of our signaling model, because at the time of production
actors must neither know nor expect that an interaction with trust at stake will follow in which their trustworthiness
may be inferred from their kindness. However, the question can be answered by our signaling model with regard to
sign display. Actors who miss being kind when they have a chance will later find it too costly (relative to the benefits)
to fabricate evidence of their kindness, while displaying the evidence will be affordable by actors who are indeed kind.
For the sake of simplicity, let us assume that trustworthiness and natural kindness are perfectly correlated and denote
the cost for displaying evidence of an actor’s kind act with s’AG and s’TG if the actor is trustworthy or untrustworthy
respectively. Displaying the evidence of one’s kindness is then a type-separating signal of trustworthiness if R + b –
s’AG > P and P > T – s’TG.
In other words, a past action that produces a sign of an unobservable property of the actor, becomes itself a new,
not directly observable property of the actor, and the displayable evidence of the action’s having occurred becomes a
new, second-order signal. Natural actions can thus make reliable communication more efficient, because it is much
cheaper for the honest actor. This is the case if the type-separating conditions apply to the displayable evidence that an
action has both occurred and that the actor did not anticipate its future information value (Gambetta and Przepiorka
2014).
Signaling theory, as part of rational choice theory, may appear to many sociologists as a blind lane, where socio-
logical relevance is inadvertently traded for theoretical rigor. However, signaling theory is being developed further,
and we believe that the pairing of formal game-theoretic modelling with an open eye for the games we play in every-
day life (Goffman 1959, 1969), will make signaling theory a widely used instrument in sociological scholarship. How-
ever, theoretical innovations must be put to an empirical test and confronted with sociologically relevant phenomena.
In the next section, we review some empirical tests of the theoretical arguments we have presented in this chapter.
Most of these studies are laboratory experiments conducted by sociologists testing hypotheses regarding trust and
trustworthiness in trust dilemmas. (For an earlier review of experiments with “signaling games,” see Camerer 2003:
Ch. 8.)

5 Experimental evidence
To our knowledge, Bolle and Kaehler (2007) are the first to experimentally investigate a signaling model of social
exchange. In their experiment, a trustworthy trustee benefits from meeting a truster’s advance, whereas an untrustwor-
thy trustee benefits from not meeting the truster’s advance. Participants in the role of truster cannot tell trustworthy
from untrustworthy types, but they know that they will meet a trustworthy trustee with probability α which is varied in
the experiment. In one experimental condition (low-alpha), α is low so that the truster has a higher expected payoff
from not making an advance (i.e., the condition specified in equation (1) is not met). In the other experimental condi-
――
4 The notion of naturally produced signs relates to Spence’s notion of indices (Spence 1974:9–11 and Ch. 4) and Frank’s notion of passive
signals (Frank 1988: Ch. 5). However, by introducing the distinction between sign production and display, indices or passive signals can also
become signals at the level of display (Gambetta and Przepiorka 2014).
9

tion (high-alpha), α is high enough so that a truster has a higher expected payoff from making an advance. In both
conditions, the trustees can signal their trustworthiness by making a costly gift to a truster before the truster decides
whether to make an advance. If a trustee decides to make a gift, he or she incurs the costs for doing so irrespective of
what the truster does thereafter. In this experimental setup, the payoffs are such that an untrustworthy trustee does not
gain from sending a gift, even if the truster makes an advance after having received the gift. Thus, a gift is a type-
separating signal because only trustworthy trustees gain from sending it. Although the truster would benefit from
knowing the trustee’s type in both the low-alpha and the high-alpha condition, a type-separating equilibrium is more
likely to emerge in the low-alpha condition. The reason is that, in the high-alpha condition, trusters can be expected to
make an advance without being sent a gift, which eliminates the trustees’ incentives to send a gift. It is therefore more
likely that a pooling equilibrium emerges in which no trustee sends a gift. Although their results concur imperfectly
with these theoretical predictions, the results are quite close.
A related study is conducted by Przepiorka and Diekmann (2013) to test a theoretical argument put forward by
Posner (1998; 2000). Posner suggests that trustees interested in long-term social exchange relations invest in signals so
that trusters can discriminate between them and less trustworthy trustees, who are not interested in long-term social
exchange relations. Unlike in Bolle and Kaehler (2007), trustees differ in their probabilities that in a series of trust
dilemmas a further interaction will take place between the same actors, rather than in their payoffs from a single en-
counter. Consequently, only trustees with a high probability of repeated encounters are compensated for the costs they
incur if they send a signal, which establishes the conditions for a type-separating equilibrium. In line with expecta-
tions, these trustees are more trustworthy and spend more money on signals than trustees with a low probability of
repeated encounters. Also in accordance with theoretical expectations, signaling behavior is more indicative of type in
the low-alpha condition than in the high-alpha condition, where the probability of being trusted is high and sending
signals therefore not worthwhile. Contrary to expectations, however, signaling does not enhance the level of trust in
the low-alpha condition relative to the trust level in the condition without a signaling opportunity. The reason is the
high level of unconditional trust in the absence of a signaling opportunity (see Camerer and Weigelt 1988). Still, the
more trustees spend on signaling, the higher the probability that trusters make an advance. As in the Bolle and Kaehler
(2007) experiment, trusters benefit from the introduction of a signaling opportunity, while the opposite is true for trus-
tees, mainly due to the costs they incur from sending signals.
In another computerized laboratory experiment, Fehrler and Przepiorka (2013) test the hypothesis that generosity
in the form of charitable giving is a signal of trustworthiness, which can be expected based on evolutionary reasoning
(Gintis, Smith, and Bowles 2001). They exploit the natural variation in subjects’ generosity and trustworthiness rather
than inducing different types of trustees by varying monetary incentives. Their results show that trustees who give to
charity are indeed more trustworthy, and trusters infer the trustees’ trustworthiness from these trustees’ generosity
when they decide whether to make an advance in a trust dilemma.
In all the three studies discussed above, real (i.e., monetary) signaling costs are the same for all trustee types. As
elaborated in the first part of this chapter, there are two general conditions under which a signal can be type-separating
but equally costly for all types. The first condition is that the benefits of the trustees differ such that it only pays for the
trustworthy trustees to send a signal. The second condition is that it does not pay for any of the types to send a signal,
but the trustworthy type reaps an additional intrinsic benefit from sending a signal and meeting a truster’s advance.
Examples of the first condition are given in Bolle and Kaehler (2007) and Przepiorka and Diekmann (2013). In
both studies, the costs for sending the signal are the same for all trustees. However, it only pays for trustworthy trus-
tees to send a signal and realize an exchange, whereas this does not pay for untrustworthy trustees (i.e., R – P + b > s >
T – P). An example of the second condition is given in Fehrler and Przepiorka (2013). In their study, not only are the
signaling costs the same for both types, but a successful exchange does not even entirely compensate the trustworthy
type for the signaling costs. It is exactly the willingness to be generous and give to charity, even if such charitable
giving is costly, that distinguishes trustworthy from untrustworthy types. In other words, there is a correlation between
the willingness to produce the signal and trustworthiness: the trustworthy trustees, via their other-regarding prefer-
ences, derive an intrinsic benefit from giving to charity as they do from meeting a truster’s advance (R + b – s + g > P
and P > T – s). This is in line with a recent study conducted by Berger (2016b), which shows that pro-environmental
behavior correlates with trustworthiness, and that trusters infer trustees’ trustworthiness from these trustees’ decisions
to buy environmentally friendly products as opposed to conventional products.
Several experimental studies have been conducted which illustrate the distinction between signals and signs of
trustworthiness, as well as the production and display of such signals and signs. An interesting example of a naturally
produced sign of trustworthiness is discussed by Feinberg, Willer, and Keltner (2012). In a series of (quasi-) experi-
mental studies, the authors find that the extent of embarrassment displayed by a subject in awkward social situations is
10

predictive of his or her trustworthiness, and observers use embarrassment as an indicator for trustworthiness in the
trust dilemma. In everyday interactions, embarrassment is difficult to produce strategically; it is therefore a sign rather
than a signal.
Generosity can also be a sign of trustworthiness. Gambetta and Przepiorka (2014) conduct an experiment in which
they let subjects produce signs and signals of trustworthiness by letting them decide between a generous and a selfish
division of money in the dictator game (DG). In one condition, subjects make their DG decisions without knowing that
a trust dilemma will follow in which they will act as trustees. These subjects’ DG decisions thus produce signs natural-
ly. In another condition, subjects know everything from the start and are thus able to produce signals strategically. In a
second stage comprising a trust dilemma, trusters can use information about trustees’ DG decisions as an indicator of
trustworthiness. It turns out that trusters rely on this information more if trustees were not aware that a trust dilemma
would follow after the DG. What is more, given an opportunity to display how they decided in the DG, generous trus-
tees display their generosity, whereas selfish trustees try to hide their selfishness (see also Gambetta and Székely
2014).

6 Conclusion and outlook

Since it was put forward 40 years ago, signaling theory has been used to explain behavior in social interaction by biol-
ogists, economists and other social and behavioral scientists. Only relatively recently have sociologists become inter-
ested in signaling theory, and its application in sociology is still rare. This may seem understandable: signaling theory
has often been presented in formal, game theoretic terms, and most sociologists balk at formal theorizing, not to speak
of rational choice and game theory. Even those more inclined to formal theoretical approaches may have found signal-
ing theory too blunt an instrument to explain sociologically relevant phenomena. We suspect that the following four
misconceptions contribute to the relatively low appreciation of signaling theory in sociology: (1) signaling theory is
about signaling costs; (2) to be type-separating, signaling costs must differ across types; (3) signals are always pro-
duced strategically; and (4) type-separating signals must be costly. The aim of this chapter has been to make signaling
theory more accessible to sociological scholarship by resolving these misconceptions.
By first distinguishing between signaling costs and benefits, we resolve misconceptions (1) and (2). This may
seem trivial, but experience has taught us that the obvious tends to be overlooked, particularly its implications. While
signaling costs accrue when signals are produced, their benefits lie in the future. More importantly, with this distinc-
tion in mind, it becomes conceivable that the benefits of signals can differ across types and not only the costs. It fol-
lows that it is the difference in net benefits that makes a signal potentially type-separating, not necessarily the differ-
ence in costs alone. This conceptual distinction between signaling costs and benefits opens the door for signaling
theory to explain cultural consumption and the emergence of seemingly irrational norms (Wenegrat et al. 1996; Posner
2000; Voland 2004; Diekmann and Przepiorka 2010).
Second, by distinguishing between signals and signs, and between the production and the display of signals and
signs, we resolve misconceptions (3) and (4). Some actions are strategic, produced for the purpose of informing others
about one’s unobserved properties and persuade them to act in a certain way. Strategically-produced signals are type-
separating if they are unaffordable by mimics. Other actions, chosen for other purposes, can still send information as a
by-product; if actors do not anticipate the information value of their actions, the signs these actions produce can be
persuasive even if their production is virtually costless and thus affordable by mimics. Once produced, signs (and
signals) can be later re-displayed with efficiency gains. This requires hard-to-fake evidence (a second-order signal) to
prove that their production occurred and show the “type-separating” conditions under which it did so. The distinction
between signals that are produced strategically and signs that are produced naturally opens the door for signaling
theory to be applied on “cheap” actions such as gestures and talk (Gambetta and Przepiorka 2014). Moreover, the
distinction between production and display enables signaling theory to be applied on any kind of evidence for one’s
past actions and to conceptually incorporate reputation formation, the acquisition of social capital, and the emergence
of institutions that promote cooperation in humans under its theoretical framework (Diekmann 2007; Przepiorka 2013).
Sociologists have just started to explore and exploit the potential of signaling theory to explain behavior in social
interactions. In this chapter, we have also reviewed empirical evidence, mostly coming from laboratory experiments
with trust dilemmas. Apart from a relatively complex setup, a major challenge researchers face when testing signaling
models experimentally is the inducing of different actor types (e.g., trustworthy and untrustworthy trustees). In theory,
assuming rational and self-regarding actors, one can derive the conditions under which a type-separating signaling
equilibrium is most likely to emerge (see above). In practice, these conditions depend on subjects’ beliefs and behav-
11

iors. For example, despite being informed that a high proportion of interactions will take place in the TG rather than
the AG (see Figure 1), subjects may still believe the probability of meeting a trustworthy trustee is high because they
expect other subjects to have other-regarding preferences. In line with this conjecture, it has been shown that an over-
whelming majority of trustees will meet a truster’s advance in the AG, but a significant proportion of trustees will also
meet a truster’s advance in the TG (Camerer 2003; Bolle and Kaehler 2007; Przepiorka and Diekmann 2013). Under
these conditions, a rational truster will make an advance anyhow, in which case a trustee will be reluctant to spend
money on sending a signal. Because a significant proportion of experimental subjects have other-regarding prefer-
ences, the conditions under which signaling should occur efficiently are difficult to implement in lab experiments, not
to mention online or field experiments (but see Berger 2016b).
One solution to this problem could be to let subjects filling the role of trusters (knowingly) interact with simulated
trustees, which are programmed to behave in accordance with the theoretic model. This strategy would allow research-
ers to test hypotheses about trusters’ behavior in an environment in which the trust problem is large enough for signals
to be worth sending (Przepiorka 2009: Ch. 6). Conversely, the same approach could be taken to investigate trustees’
signaling behavior when they knowingly interact with simulated trusters. Clearly, these approaches merely test hy-
potheses and do not tell us about the subjects’ actual beliefs, preferences and behaviors. An alternative approach,
which several recent studies have taken, is to use the natural variation in subjects’ preferences, give them an opportuni-
ty to produce signals and signs of their preferences, and investigate how far observers infer trustworthiness from these
signals and signs (e.g., Fehrler and Przepiorka 2013; Gambetta and Przepiorka 2014). This approach has been success-
ful in showing that generosity (Fehrler and Przepiorka 2013; Gambetta and Przepiorka 2014), sustainable consumption
(Berger 2016a), corporate social responsibility (Fehrler and Przepiorka 2016), and moral judgements (Simpson, Har-
rell, and Willer 2013) can function as signals and signs of trustworthiness, whereas, contrary to theoretical expecta-
tions (Gintis, Smith, and Bowles 2001), the punishment of selfishness does not seem to have this function (Przepiorka
and Liebe 2016).
It is important to know which actions convey information about actors’ trustworthiness, because knowing whom
to trust promotes cooperation and cohesion in society. If institutions are designed that ignore, or even inhibit, observa-
ble actions that produce signals and signs of trustworthiness, societies may lose their ability to reinforce the moral
principles on which they are based.
12

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