Pecuniary Emulation and Invidious Distinction: Signaling under Behavioral Diversity

Abstract

We introduce behavioral diversity to an otherwise standard signaling model, in which a fraction of agents choose their signaling actions according to an exogenous distribution. These behavioral agents provide opportunities for strategic low-type agents to successfully emulate higher types in equilibrium, which in turn reduces the cost for strategic high-type agents to separate from lower types. Behavioral diversity thus improves the equilibrium payoffs to all types of strategic agents. The model also exhibits a convergence property which is intuitively more appealing than the least-cost separating equilibrium of the standard setting.

Keywords: least-cost separating equilibrium, insensitivity to prior, behavioral diversity, equilibrium emulation

JEL Classification: D82,Z13