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A Dynamic Model of Equilibrium Selection In Signaling Markets

Author

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  • Gerorg Nöldeke
  • Larry Samuelson

Abstract

In his work on market signaling, Spence proposed a dynamic model of a signaling market in which a buyer revises prices in light of experience and sellers choose utility-maximizing signals given these prices. Spence also suggested that subjecting the dynamic process to rare perturbations might allow one to choose between multiple equilibria. This paper examines the effect of introducing such perturbations into Spence's dynamic model. We find that refinement results arise naturally from the dynamic analysis. In a broad class of markets, our model selects a separating equilibrium outcome if and only if the equilibrium outcome satisfies a version of the undefeated equilibrium concept, whereas a pooling equilibrium outcome is selected if and only if the equilibrium outcome is both undefeated and satisfies D1.
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Suggested Citation

  • Gerorg Nöldeke & Larry Samuelson, "undated". "A Dynamic Model of Equilibrium Selection In Signaling Markets," ELSE working papers 038, ESRC Centre on Economics Learning and Social Evolution.
    • Handle: RePEc:els:esrcls:038
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    References listed on IDEAS

    as
    1. Rabin, Matthew & Sobel, Joel, 1996. "Deviations, Dynamics, and Equilibrium Refinements," Journal of Economic Theory, Elsevier, vol. 68(1), pages 1-25, January.
    2. Young H. P., 1993. "An Evolutionary Model of Bargaining," Journal of Economic Theory, Elsevier, vol. 59(1), pages 145-168, February.
    3. Robson, Arthur J. & Vega-Redondo, Fernando, 1996. "Efficient Equilibrium Selection in Evolutionary Games with Random Matching," Journal of Economic Theory, Elsevier, vol. 70(1), pages 65-92, July.
    4. Fudenberg, Drew & Levine, David K, 1993. "Self-Confirming Equilibrium," Econometrica, Econometric Society, vol. 61(3), pages 523-545, May.
    5. Young, H Peyton, 1993. "The Evolution of Conventions," Econometrica, Econometric Society, vol. 61(1), pages 57-84, January.
    6. Noldeke Georg & Samuelson Larry, 1993. "An Evolutionary Analysis of Backward and Forward Induction," Games and Economic Behavior, Elsevier, vol. 5(3), pages 425-454, July.
    7. 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.
    8. Cho, In-Koo & Sobel, Joel, 1990. "Strategic stability and uniqueness in signaling games," Journal of Economic Theory, Elsevier, vol. 50(2), pages 381-413, April.
    9. Kandori, Michihiro & Mailath, George J & Rob, Rafael, 1993. "Learning, Mutation, and Long Run Equilibria in Games," Econometrica, Econometric Society, vol. 61(1), pages 29-56, January.
    10. Bergin, James & Lipman, Barton L, 1996. "Evolution with State-Dependent Mutations," Econometrica, Econometric Society, vol. 64(4), pages 943-956, July.
    11. Joseph Stiglitz & Andrew Weiss, 1990. "Sorting Out the Differences Between Signaling and Screening Models," NBER Technical Working Papers 0093, National Bureau of Economic Research, Inc.
    12. P. Young, 1999. "The Evolution of Conventions," Levine's Working Paper Archive 485, David K. Levine.
    13. Mailath George J. & Okuno-Fujiwara Masahiro & Postlewaite Andrew, 1993. "Belief-Based Refinements in Signalling Games," Journal of Economic Theory, Elsevier, vol. 60(2), pages 241-276, August.
    14. Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(4), pages 629-649.
    15. Noldeka, G. & Samuelson, L., 1994. "Learning to Signal in Market," Working papers 9409, Wisconsin Madison - Social Systems.
    16. Riley, John G, 1979. "Informational Equilibrium," Econometrica, Econometric Society, vol. 47(2), pages 331-359, March.
    17. Samuelson Larry, 1994. "Stochastic Stability in Games with Alternative Best Replies," Journal of Economic Theory, Elsevier, vol. 64(1), pages 35-65, October.
    18. Hellwig, Martin, 1987. "Some recent developments in the theory of competition in markets with adverse selection ," European Economic Review, Elsevier, vol. 31(1-2), pages 319-325.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    ract: In his work on signaling; Spence proposed a dynamic model of a market in which a buyer revises prices in light of experience and in which sellers; with private information about their types; choose utility-maximizing signals given these prices. We follows Spence's suggestion of introducing perturbations into the resulting dynamic process. In a broad class of markets; our model selects a separating equilibrium outcome if and only if the equilibrium outcome satisfies a version of the undefeated equilibrium concept; whereas a pooling equilibrium outcome is selected if and only if the equilibrium outcome is both undefeated and satisfies D1.;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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