Stochastic Signaling: Information Substitutes and Complements

36 Pages Posted: 16 Jun 2012

See all articles by Tom Truyts

Tom Truyts

KU Leuven - Faculty of Business and Economics (FEB); Facultés Universitaires Saint Louis à Bruxelles; Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)

Date Written: May 2012

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 networks, in which a social network is the source of exogenous information, qualifies the relation between network characteristics (size, density, centrality, component size) and equilibrium signaling.

Keywords: Monotonic Costly Signaling, Stochastic Signaling, Noisy Signaling, Networks, Advertising, Job Market Signaling, Conspicuous Consumption

JEL Classification: C72, D82

Suggested Citation

Truyts, Tom, Stochastic Signaling: Information Substitutes and Complements (May 2012). Available at SSRN: https://ssrn.com/abstract=2084643 or http://dx.doi.org/10.2139/ssrn.2084643

Tom Truyts (Contact Author)

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Facultés Universitaires Saint Louis à Bruxelles ( email )

Boulevard du Jardin Botanique 43
Bruxelles, 1000
Belgium

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

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