Weak and Strong Signals

24 Pages Posted: 6 May 2003

See all articles by John G. Riley

John G. Riley

affiliation not provided to SSRN

Abstract

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

Riley, John G., Weak and Strong Signals. Scandinavian Journal of Economics, Vol. 104, pp. 213-236, 2002. Available at SSRN: https://ssrn.com/abstract=317377

John G. Riley (Contact Author)

affiliation not provided to SSRN

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