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Week 11 Lecture_Signaling

# Week 11 Lecture_Signaling - Week 11 Asymmetric Information...

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Week 11 Asymmetric Information Signaling

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Checking whether a strategy profile can be an equilibrium Call the informed player A and the uninformed player B. Suppose XXX is an equilibrium. B knows A’s strategy, so by observing the actions of A, B can guess the type of A. B assumes that A is playing according to the XXX equilibrium strategy. However, if A deviates to a different strategy, it will cause B to form a wrong guess about A’s type because B still assumes that A is playing according to the XXX strategy. If such deviation is profitable for A, we can kill this XXX equilibrium!
Example: seller chooses quality to sell Suppose there is an equilibrium where all sellers choose to sell high quality umbrella. Then when seeing an umbrella, the buyer thinks that it is high quality. If a seller deviates to selling a low quality umbrella, the buyer will still think that it is a high quality and willing to pay high price for it! A very profitable deviation for this seller! So this equilibrium breaks down.

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Signaling Adverse selection is an outcome of an informational deficiency. What if information can be improved by high-quality sellers signaling credibly that they are high-quality?
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Week 11 Lecture_Signaling - Week 11 Asymmetric Information...

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