Signaling games with a highly effective signal

Abstract

AbstractWe study a class of signaling games in which one of the signals induces the receiver to take an action that provides the sender with the highest utility. This class of games has multiple pooling equilibria, but the equilibrium in which all senders′ types choose the signal that induces the receiver to take that action is more plausible than others. Although all the equilibria in pure strategies are divine in our class of games when the single-crossing condition is not satisfied, only the plausible equilibrium is a neologism-proof equilibrium. Therefore, we have identified a general class of signaling games in which the neologism-proof equilibrium is useful to select the most plausible equilibrium, whereas all the pooling equilibria survive divinity and other less restrictive refinements. We apply our model to an educational signaling game with two features. First, the highest level of education allows a worker to access a more productive segment of the labor market. Second, the educational system is non-selective and consequently, the cost of education does not change with the worker′s ability. As expected, there is overeducation in equilibrium because all worker′s types choose the highest level of education.