Signal theory (or signaling theory) describes how actors selecting among a choice set can successfully make determinations about the unobservable quality of their selection via observable signals. The theory grew out of labor economics, wherein job applicants signaled their unobservable quality via observable educational credentials, and has since been applied to diverse selection scenarios that run the gamut from anthropology to zoology. This entry explains the fundamentals of signal theory, describes four basic types of signals, and considers these in view of reputation.

Fundamental Principles

The key to understanding signal theory lies in knowing the difference between what is a signal in the vernacular and what constitutes a signal within signal theory. To do so requires that one should be able to clearly elucidate why high-quality actors ...

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