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How Wasteful is Signaling?

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  • Alex Frankel
  • Navin Kartik

Abstract

Signaling is wasteful. But how wasteful? We study the fraction of surplus dissipated in a separating equilibrium. For isoelastic environments, this waste ratio has a simple formula: $\beta/(\beta+\sigma)$, where $\beta$ is the benefit elasticity (reward to higher perception) and $\sigma$ is the elasticity of higher types' relative cost advantage. The ratio is constant across types and is independent of other parameters, including convexity of cost in the signal. We show that the directional effects of $\beta$ and $\sigma$ on waste extend to non-isoelastic environments.

Suggested Citation

  • Alex Frankel & Navin Kartik, 2026. "How Wasteful is Signaling?," Papers 2601.14454, arXiv.org, revised Apr 2026.
    • Handle: RePEc:arx:papers:2601.14454
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    References listed on IDEAS

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    1. Heidrun C. Hoppe & Benny Moldovanu & Aner Sela, 2009. "The Theory of Assortative Matching Based on Costly Signals," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 76(1), pages 253-281.
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    6. Mailath, George J, 1987. "Incentive Compatibility in Signaling Games with a Continuum of Types," Econometrica, Econometric Society, vol. 55(6), pages 1349-1365, November.
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