Signaling Private Choices
57 Pages Posted: 3 Nov 2012
Date Written: October 1, 2012
Abstract
For a number of applications of signaling, it is sometimes more reasonable to assume that senders rather than nature choose their unobserved features (e.g. their private choices of quality). In other situations, it makes no sense for nature to determine senders' unobserved features (e.g. their private choices of capacity, investment, contract or price). We identify a general class of such endogenous signaling problems. We provide a relatively straightforward method to characterize the reasonable equilibria for these problems. A simple class of monotone endogenous signaling games is characterized to illustrate some interesting properties of these equilibria. We also explain how to apply our framework to more complicated settings, including to situations which are not usually considered as signaling problems (e.g. to loss-leader pricing and to the opportunism problem that arises in vertical contracting).
Keywords: signaling, invariance, loss leader, opportunism, announcements
JEL Classification: C72, D82, L10
Suggested Citation: Suggested Citation