Signaling Game (Costly Signals)

An informed sender chooses an observable action that a receiver uses to infer a hidden attribute; credible separation depends on different incentives across types.

A signaling game has a sender with private information and a receiver who interprets an observable action before responding. In a separating equilibrium, different types choose different signals. A costly signal can help separate types when their incentives to produce it differ, often because the cost relative to the benefit is lower for one type.

Expense alone does not establish credibility. A low-quality seller may still find a costly campaign profitable, while a capable person may lack resources for an expensive credential. Receivers must ask how the action changes incentives for each possible sender and whether the resulting interpretation is justified. Signals can also provide direct evidence or create value; those mechanisms should be distinguished from pure signaling.

When to use it

Useful when evaluating promises, credentials, guarantees, or other actions offered as evidence of hidden quality.

How it can help

Examine who could profitably imitate a signal instead of trusting expense alone.