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Separating Equilibrium in Signalling Games
A separating equilibrium is an outcome in a signalling game where agents of different 'types' (e.g., high-productivity vs. low-productivity workers) choose different signals, allowing the uninformed party (e.g., an employer) to correctly infer each agent's type from the signal observed. This outcome arises only when the signal's cost is low enough that it is worthwhile for the high-quality type to send it, but high enough that it is not worthwhile for the low-quality type to mimic it. It is the counterpart to a pooling equilibrium, in which all types choose the same signal and no information is revealed.
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Economics
Economy
Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
CORE Econ
Social Science
Empirical Science
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The Economy 2.0 Macroeconomics @ CORE Econ
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A firm wants to hire new employees and knows that there are two types of workers: high-productivity and low-productivity. High-productivity workers will generate $100,000 in value, while low-productivity workers will generate $50,000. The firm cannot tell the workers apart before hiring them. Obtaining a professional certification is a possible way for workers to signal their type. The cost of obtaining this certification is $20,000 for a high-productivity worker but $60,000 for a low-productivi
Used Car Market Signalling Strategy
Consider a market where a buyer wants to distinguish between high-quality and low-quality sellers. Sellers can choose to offer a product warranty as a signal of their quality. The cost of offering this warranty is $3,000 for a high-quality seller but $7,000 for a low-quality seller. The buyer, observing the warranty, is willing to pay a price premium of $8,000 for products that come with it. In this situation, a separating equilibrium will occur where only high-quality sellers choose to offer th
Calculating the Signalling Cost Boundary
Critique of a Flawed Signalling Strategy
In a labor market model where potential employees signal their productivity to a firm by acquiring an educational degree, match each element of the model to its correct description. The goal is to achieve an outcome where the firm can distinguish between high and low-productivity workers.
A firm is trying to distinguish between high-productivity and low-productivity job applicants. A university degree can serve as a signal. Arrange the following events in the logical order that leads to an outcome where the firm can successfully identify each type of worker based on their choice to get a degree.
In a scenario where an informed party (e.g., a job applicant) wants to convey their 'type' (e.g., high-productivity) to an uninformed party (e.g., an employer), they can use a costly action (e.g., obtaining a certification). For this action to successfully reveal the applicant's true type, the cost must be low enough for the high-productivity type to justify the resulting benefit, but high enough to deter the low-productivity type. When these conditions are met and the two types choose different
Designing an Insurance Market Solution
Analysis of Signalling Effectiveness