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The Intuitive and Divinity Criterion: Interpretation and Step-by-Step Examples

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  • Munoz-Garcia Felix
  • Espinola-Arredondo Ana

Abstract

The paper presents an intuitive explanation of the Cho and Kreps' (1987) Intuitive Criterion, and the Banks and Sobel's (1987) Divinity Criterion (also referred as D1-Criterion). We provide multiple examples in which students can understand, step-by-step, the two main phases involved in these refinement criteria. Furthermore, we present economic settings in which the Cho and Kreps' (1987) Intuitive Criterion does not restrict the set of equilibria, while the Banks and Sobel's (1987) Divinity Criterion help refine the set of admissible separating equilibria in signaling games.

Suggested Citation

  • Munoz-Garcia Felix & Espinola-Arredondo Ana, 2011. "The Intuitive and Divinity Criterion: Interpretation and Step-by-Step Examples," Journal of Industrial Organization Education, De Gruyter, vol. 5(1), pages 1-20, March.
    • Handle: RePEc:bpj:jioedu:v:5:y:2011:i:1:n:7
    DOI: 10.2202/1935-5041.1024
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    References listed on IDEAS

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    1. Milgrom, Paul & Roberts, John, 1982. "Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis," Econometrica, Econometric Society, vol. 50(2), pages 443-459, March.
    2. Esther Gal-Or, 1989. "Warranties as a Signal of Quality," Canadian Journal of Economics, Canadian Economics Association, vol. 22(1), pages 50-61, February.
    3. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 179-221.
    4. Vega-Redondo,Fernando, 2003. "Economics and the Theory of Games," Cambridge Books, Cambridge University Press, number 9780521775908, September.
    5. Banks, Jeffrey S & Sobel, Joel, 1987. "Equilibrium Selection in Signaling Games," Econometrica, Econometric Society, vol. 55(3), pages 647-661, May.
    6. John, Kose & Williams, Joseph, 1985. "Dividends, Dilution, and Taxes: A Signalling Equilibrium," Journal of Finance, American Finance Association, vol. 40(4), pages 1053-1070, September.
    7. Michael Spence, 1973. "Job Market Signaling," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 87(3), pages 355-374.
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    Cited by:

    1. Tamer Boyaci & Yalçin Akçay, 2016. "Pricing when customers have limited attention," ESMT Research Working Papers ESMT-16-01, ESMT European School of Management and Technology, revised 19 Jan 2017.
    2. Hallman, Alice & Spiro, Daniel, 2023. "A theory of hypocrisy," Journal of Economic Behavior & Organization, Elsevier, vol. 211(C), pages 401-410.
    3. Munoz-Garcia Felix, 2012. "A systematic procedure for finding Perfect Bayesian Equilibria in Incomplete Information Games," Journal of Industrial Organization Education, De Gruyter, vol. 6(1), pages 1-18, December.
    4. Peyman Khezr & Abhijit Sengupta, 2014. "Signalling quality with posted prices," Discussion Papers Series 532, School of Economics, University of Queensland, Australia.

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