Signaling

Signaling refers to market actors' use of visible attributes that convey information to or change the beliefs of other actors in the market. Because signals are under the control of the signaler, they are, at least partially, designed to communicate. Hence, signaling theory essentially captures an economic view of reputation in the market. Signals are observable proxies for unobservable attributes of individuals or organizations. For example, an individual's conspicuous consumption may be a signal of wealth and social status. Organizations may invest in reputation building to signal the greater quality of their products and services. Signals are necessary in uncertain economic environments where sellers know more than buyers (i.e., where information asymmetry exists). In this context, we must distinguish between signals and indices (such as ...