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Weak and Strong Signals

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  • Riley, John G

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. Copyright 2002 by The editors of the Scandinavian Journal of Economics.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

Volume (Year): 104 (2002)
Issue (Month): 2 (June)
Pages: 213-36

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Handle: RePEc:bla:scandj:v:104:y:2002:i:2:p:213-36

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Web page: http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1467-9442

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Cited by:
  1. Daniel McFadden & Carlos Noton & Pau Olivella, 2012. "Remedies for Sick Insurance," Working Papers 620, Barcelona Graduate School of Economics.
  2. Aidis, Ruta & van Praag, Mirjam, 2007. "Illegal entrepreneurship experience: Does it make a difference for business performance and motivation?," Journal of Business Venturing, Elsevier, vol. 22(2), pages 283-310, March.
  3. van Praag, Mirjam & van Witteloostuijn, Arjen & van der Sluis, Justin, 2009. "Returns for Entrepreneurs vs. Employees: The Effect of Education and Personal Control on the Relative Performance of Entrepreneurs vs. Wage Employees," IZA Discussion Papers 4628, Institute for the Study of Labor (IZA).
  4. Habermalz, Steffen, 2003. "Job Matching and the Returns to Educational Signals," IZA Discussion Papers 726, Institute for the Study of Labor (IZA).
  5. Kjell Hausken, 2006. "A General Equilibrium Model of Signaling and Exchange," Levine's Working Paper Archive 618897000000001035, David K. Levine.

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