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Testing the sender: When signaling is not enough
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Testing the sender: When signaling is not enough

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  • Nicolás Figueroa
  • Carla Guadalupi

Abstract

We study signaling in the presence of endogenous information acquisition by the receiver. A firm, after observing the worker’s costly action, may acquire further information by performing a test on the applicant, and then decide to hire him. We consider different models of information acquisition, including the rational inattention, a generalization of the “truth or noise” and a general grading model. We study test effectiveness as function of beliefs generated through signaling by the worker, and provide clear-cut predictions on the complementarity/substitutability between costly information transmission (signaling) and acquisition, and its implications for the equilibrium. We first show that test effectiveness is non-monotone in beliefs. It exhibits increasing regions, where beliefs and test effectiveness act as complements, with higher beliefs inducing more effective tests, and decreasing regions in which higher beliefs crowd out the firm’s information acquisition. We then show that, when beliefs and test effectiveness are complements, the equilibrium involves (at least partial) separation between workers’ types. Since the high type is more willing to face a more exacting test than a low type, he will exert costly effort to improve the firm’s opinion. When beliefs and test effectiveness are substitutes, any signaling attempt by the high type will be mimicked by the low one who benefits more from relaxed standards and indiscriminate hiring, and the only plausible equilibrium involves both types pooling.

Suggested Citation

  • Nicolás Figueroa & Carla Guadalupi, 2020. "Testing the sender: When signaling is not enough," Documentos de Trabajo 547, Instituto de Economia. Pontificia Universidad Católica de Chile..
    • Handle: RePEc:ioe:doctra:547
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    1. Matveenko, Andrei & Starkov, Egor, 2023. "Sparking curiosity or tipping the scales? Targeted advertising with consumer learning," Journal of Economic Behavior & Organization, Elsevier, vol. 213(C), pages 172-192.

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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