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A Dynamic Model of Equilibrium Selection in Signaling Markets

Author

Listed:
  • Noeldeke, Georg

    (Department of Economics, University of Bonn)

  • Samuelson, Larry

    (Department of Economics, University of Wisconsin)

Abstract

In his work on market signaling, Spence proposed a dynamic model of a signaling market in which a buyer revises prices in light of experience and sellers choose utility-maximizing signals given these prices. Spence also suggested that subjecting the dynamic process to rare perturbations might allow one to choose between multiple equilibria. This paper examines the effect of introducing such perturbations into Spence's dynamic model. We find that refinement results arise naturally from the dynamic analysis. In a broad class of markets, our model selects a separating equilibrium outcome if and only if the equilibrium outcome satisfies a version of the undefeated equilibrium concept, whereas a pooling equilibrium outcome is selected if and only if the equilibrium outcome is both undefeated and satisfies D1.

Suggested Citation

  • Noeldeke, Georg & Samuelson, Larry, 1996. "A Dynamic Model of Equilibrium Selection in Signaling Markets," Economics Series 27, Institute for Advanced Studies.
    • Handle: RePEc:ihs:ihsesp:27
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    File URL: https://irihs.ihs.ac.at/id/eprint/889
    File Function: First version, 1996
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    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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