Originated by A. Michael Spence (Job Market Signaling, 1973), with a standard treatment by Martin J. Osborne (An Introduction to Game Theory, 2004).
Explains how one party conveys hidden quality through an action too costly for a weaker party to copy, and how the other side reads such signals.
When to reach for it
Credentials, guarantees, or commitments are being used to prove quality, or a claim must be made believable to someone who cannot verify it directly.
How it runs
- Name what one side knows that the other cannot see.
- List the signals available and what each costs.
- Check that low-quality senders would find the signal too costly.
- Choose a signal that separates the types.
- Read incoming signals by asking what they cost to send.
Where it sits in SOLVE eX
Go to the source
- Job Market Signaling, Quarterly Journal of Economics, 1973
- An Introduction to Game Theory, Oxford University Press, 2004