Signalling (economics)

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Signalling (or signaling; see spelling differences) is a theory of decision-making and communication under imperfect or incomplete information. It describes situations in which a signaler uses observable actions, attributes, or communications (signals) to convey credible information about otherwise unobservable qualities to a receiver. Signals are most credible when they are differentially costly (i.e., harder or more expensive for low-quality signalers to produce or imitate than for high-quality signalers). Signaling theory is about decision-making and communication under incomplete information. It describes situations in which signalers send observable actions, attributes, or communications that carry credible information about unobservable qualities that matter for a receiver's choice. Signals are most informative when they are differentially costly, meaning they are highly costly for low-quality signalers and less costly for high-quality signalers. In many applications, the signaling...

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