Signaling Game Examples

Game Theory · Axiom Academy

EXAMPLE Signaling Game Examples Unit 5 - Games with Incomplete Information Excellent work! You've completed this signaling game analysis. Here's what we learned: Signaling games model incomplete information: Workers know their own type (high or low ability) but employers must infer ability from observable signals like education. Separating equilibria reveal types: In a separating equilibrium, different types choose different education levels, allowing employers to perfectly infer ability. This requires high-ability workers to find education less costly than low-ability workers. Pooling equilibria hide information: In pooling equilibria, both types choose the same education level, so employers learn nothing from the signal and must rely on prior beliefs about worker ability. Incentive compatibility is crucial: For equilibria to exist, no player should want to deviate. High types must prefer their high-wage outcome to mimicking low types, and low types must prefer their equilibrium payoff to pretending to be high types. Cost differentials drive separation: Separating equilibria exist when the cost of education differs enough between types that low-ability workers find it unprofitable to acquire high education even for higher wages. Multiple equilibria are common: Signaling games often have both separating and pooling equilibria, and which one emerges depends on beliefs and refinement criteria.

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