Weak and Strong Signals
24 Pages Posted: 6 May 2003
Akerlof, Spence and Stiglitz showed that competitive markets can perform very poorly in the presence of informational asymmetry. In this paper I show that if there is a signaling technology which is sufficiently strong (i.e., the marginal cost of signaling declines sufficiently rapidly with quality) the cost of sorting is low and a Nash equilibrium exists. Empirically testable necessary and sufficient conditions for existence are derived. I further show that if Akerlovian participation constraints are added to a signaling model there is a minimum signaling threshold. Finally I argue that these conclusions hold regardless of whether it is the uninformed or informed agents who move first.
Keywords: Adverse selection, screening, signaling, asymmetric information, signaling threshold
JEL Classification: D8
Suggested Citation: Suggested Citation