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 represents 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 their greater quality of 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, a distinction must be made between signals and indexes (e.g., race ...