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The Welfare Cost of Signaling

by 1,2 and 2,*
1
Economics area, New York University Shanghai, 1555 Century Ave, Pudong, Shanghai 200122, China
2
Economics Department, University of Missouri, 901 University Avenue, Columbia, MO 65211-1140, USA
*
Author to whom correspondence should be addressed.
Games 2017, 8(1), 11; https://doi.org/10.3390/g8010011
Received: 17 August 2016 / Accepted: 18 January 2017 / Published: 9 February 2017
(This article belongs to the Special Issue Epistemic Game Theory and Logic)
Might the resource costliness of making signals credible be low or negligible? Using a job market as an example, we build a signaling model to determine the extent to which a transfer from an applicant might replace a resource cost as an equilibrium method of achieving signal credibility. Should a firm’s announcement of hiring for an open position be believed, the firm has an incentive to use a properly-calibrated fee to implement a separating equilibrium. The result is robust to institutional changes, outside options, many firms or many applicants and applicant risk aversion, though a sufficiently risk-averse applicant who is sufficiently likely to be a high type may lead to a preference for a pooling equilibrium. View Full-Text
Keywords: costly signaling; social cost of signaling; asymmetric information; separating equilibrium costly signaling; social cost of signaling; asymmetric information; separating equilibrium
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Yang, F.; Harstad, R.M. The Welfare Cost of Signaling. Games 2017, 8, 11.

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