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The Welfare Cost of Signaling

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  • Fan Yang

    (Economics area, New York University Shanghai, 1555 Century Ave, Pudong, Shanghai 200122, China
    Economics Department, University of Missouri, 901 University Avenue, Columbia, MO 65211-1140, USA)

  • Ronald M. Harstad

    (Economics Department, University of Missouri, 901 University Avenue, Columbia, MO 65211-1140, USA)

Abstract

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.

Suggested Citation

  • Fan Yang & Ronald M. Harstad, 2017. "The Welfare Cost of Signaling," Games, MDPI, vol. 8(1), pages 1-21, February.
  • Handle: RePEc:gam:jgames:v:8:y:2017:i:1:p:11-:d:89765
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    References listed on IDEAS

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    Cited by:

    1. Oren Perez & Reuven Cohen & Nir Schreiber, 2019. "Governance through global networks and corporate signaling," Regulation & Governance, John Wiley & Sons, vol. 13(4), pages 447-469, December.
    2. Paul Weirich, 2017. "Epistemic Game Theory and Logic: Introduction," Games, MDPI, vol. 8(2), pages 1-3, March.

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