signaling

=**__Signaling:__**=

A signaling game is a game in which a player with private information (the informed player) sends a signal of his private type to the uninformed player before the uninformed player makes a choice. The idea that insiders have information not available to the market. Moves made by insiders can signal information to outsiders and change the stock price. The thinking goes that if a high level executive, such as a CEO, is selling, he or she is probably doing so for a reason that you, as the public, don't know yet, so you should get out also. The same is true for the opposite. If an insider is buying in his or her company, it signals outsiders to also buy based on the idea that the insider knows more than he or she is letting on to the public. In the marketplace, signaling can be used by both the buyer and the seller. The seller will use signaling to communicate to a buyer the qualities and reasons to buy a product, while the buyer will use signaling to express their interest in the product and that they are able to purchase it.
 * __Introduction:__**

The concept of Signaling was furthered by the works of [|A. Michael Spence] in 1973 in his job market model.

1) Job candidate putting their GPA on their resume. This communicates to the possible employer the job candidate's past performance and possible future performance.
 * __Real-World Signaling examples:__**

2) Job candidate suggesting to potential employer the mininum salary that is acceptable. This communicates the needed working conditions and will reduce the amount of time spent on the interview process, either the process will end early due to the company not willing to pay the required salary, or will reduce the amount of time spent on salary negotiations.

3) Label on a product that states "New and Approved". Informs a customer that the product works better than before in order to attract new customers or to keep existing customers.

4) Car Dealer trying to sell a car to a customer. A car dealer will communicate the various features that the car has, the performance, and ways to purchase.


 * __External links and references:__**

1) [|Economics.about.com] 2) Managerial Economics and Business Strategy (5th Edition) - Michael R. Baye 3) Michael Spence (1973). "**Job Market Signaling**". //Quarterly Journal of Economics,// 87, p355 4) [|Investopedia.com-Signalling]


 * __Example Multiple Choice Questions:__**

Signaling is: a) Attempt by an uninformed party to communicate a hidden characteristic to an uninformed party. b) Attempt by an informated party to communicate a hidden characteristic to an informed party. c) Attempt by an informated party to communicate a hidden characteristic to an uninformed party. d) Attempt by an uninformed party to communicate a hidden characteristic to an informed party.
 * Question 1:**


 * Answer is d).**

During a job interview an applicant would be signaling by: a) including his GPA on an a resume b) listing notable and relevant achievements c) including current salary information d) all of the above
 * Question 2:**


 * Answer is d).** All of the above would communicate helpful information to the interviewer.

When a new car salesman states to a customer that a car comes with an extended warranty, the car salesman is most likely: a) commenting a moral hazard b) screening the buyer's ability to purchase the car c) commenting a mortal sin d) signaling to a buyer why the car is better than other models
 * Question 3:**

the car. A "moral" sin is possible, but lying about a car is not serious enough to be a "mortal" sin. The communicating of the extended warranty is a way to signal to the buyer the higher quality of the car over other cars.
 * Answer is d).** A moral hazard is possible, but unlikely since the car dealer would end up paying to repair

Which of the following questions that a father might ask of his daughter's Date is an example of Signaling: a) what kind of car he drives? b) what kind of job he has? c) what kind of medical coverage he has? d) what are their plans tonight?
 * Question 4:**

something could happen to the Date that needs medical coverage if anything happens to his daughter.
 * Answer is: c)** what kind of medical coverage he has. The father is signaling a suttle hint that