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Stochastic signaling: information substitutes and complements

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  • TRUYTS, Tom

    (University of Leuven, CES, B-3000 Leuven, Belgium; Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium)

Abstract

I develop a model of stochastic costly signaling in the presence of exogenous imperfect information, and study whether equilibrium signaling decreases ('information substitutes') or increases ('information complements') if the accuracy of exogenous information increases. A stochastic pure costly signaling model is shown to have a unique sequential equilibrium in which at least one type (and possibly all) engages in costly signaling. In the presence of exogenous information, a unique threshold level of prior beliefs generically exists which separates the cases of information complements and substitutes. More accurate exogenous information can induce a less informative signaling equilibrium, and can result in a lower expected accuracy of the uninformed party's equilibrium beliefs. An application to signaling in net- works, in which a social network is the source of exogenous in- formation, qualifies the relation between network characteristics (size, density, centrality, component size) and equilibrium signaling.

Suggested Citation

  • TRUYTS, Tom, 2012. "Stochastic signaling: information substitutes and complements," LIDAM Discussion Papers CORE 2012022, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2012022
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    File URL: https://sites.uclouvain.be/core/publications/coredp/coredp2012.html
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    References listed on IDEAS

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    Cited by:

    1. Ennio Bilancini & Leonardo Boncinelli, 2014. "Small Noise in Signaling Selects Pooling on Minimum Signal," Center for Economic Research (RECent) 101, University of Modena and Reggio E., Dept. of Economics "Marco Biagi".
    2. Mertens, Jean-François & Rubinchik, Anna, 2015. "Pareto Optimality Of The Golden Rule Equilibrium In An Overlapping Generations Model With Production And Transfers," Macroeconomic Dynamics, Cambridge University Press, vol. 19(8), pages 1780-1799, December.

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    More about this item

    Keywords

    monotonic costly signaling; stochastic signaling; noisy signaling; networks; advertising; job market signaling; conspicuous consumption;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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