Signaling theory as a term in economics or game theory usually refers to the analysis of situations where an agent takes an action that transmits information that some other agent (or rather, the “principal”) does not have, and which influences the principal’s behavior. The agent is also often called the sender and the principal the receiver of the signal.
Often, this is information about the agent, but sometimes it is information about something else, so we can generally just say it is information about “the state of the world” or “the state of nature”. Usually, signaling theory is concerned with situations in which the information cannot be transmitted by “mere assertion” (or “cheap talk”, see below) but only by a costly action, and the cost of transmitting information about certain states of the world has to be different from transmitting information about other states of the world in certain ways; e.g. in Spence’s job-market signaling model, low-ability workers must have a higher cost of attaining education than high-ability workers, otherwise low-ability workers would also do it and the signal is worthless. (Note that in these models, the agent moves first and the principal second, but still the principal offers a contract based on the received information. If the principal moves first and offers a contract to the informed agent, we are in contract theory. Signaling theory and contract theory together are sometimes referred to as “information economics”, “economics of asymmetric information”, or sometimes the “theory of incentives”.)
Situations in which there are no such costly signals are usually called “cheap talk” models. Of course, if there is no conflict of interest, the informed party can always just transfer the information (and there would also be no need for costly signals then). But suppose there is a conflict of interest between the informed sender and the uninformed receiver. Then which kind of information is transmittable? The seminal paper is by Crawford and Sobel. They show that, basically, very fine-grained information transmission does not work when there is a conflict of interest.
Finally, if a sender can send costless credible signals but can strategically choose which ones, we are in the domain of “Bayesian persuasion” models.
(If you can send signals that are costless and there is no conflict of interest, then we are maybe back in basic statistical theory if the signals are noisy, but I guess there is no room for an economic analysis.)
These two domains seen to capture the twin aspects of my favorite signaling topic, flirtation. “Cheap talk” is where you try and display your attractive qualities. “Bayesian persuasion” is where you reveal information, often non-verbally, in order to get someone to escalate, back off, change their tactics, and so on.
I think some of the confusion with signaling arises from the fact that the labels aren’t very intuitive and that these two domains are easy to either conflate, or focus on one at the expense of the other.
Signaling theory as a term in economics or game theory usually refers to the analysis of situations where an agent takes an action that transmits information that some other agent (or rather, the “principal”) does not have, and which influences the principal’s behavior. The agent is also often called the sender and the principal the receiver of the signal.
Often, this is information about the agent, but sometimes it is information about something else, so we can generally just say it is information about “the state of the world” or “the state of nature”. Usually, signaling theory is concerned with situations in which the information cannot be transmitted by “mere assertion” (or “cheap talk”, see below) but only by a costly action, and the cost of transmitting information about certain states of the world has to be different from transmitting information about other states of the world in certain ways; e.g. in Spence’s job-market signaling model, low-ability workers must have a higher cost of attaining education than high-ability workers, otherwise low-ability workers would also do it and the signal is worthless. (Note that in these models, the agent moves first and the principal second, but still the principal offers a contract based on the received information. If the principal moves first and offers a contract to the informed agent, we are in contract theory. Signaling theory and contract theory together are sometimes referred to as “information economics”, “economics of asymmetric information”, or sometimes the “theory of incentives”.)
Situations in which there are no such costly signals are usually called “cheap talk” models. Of course, if there is no conflict of interest, the informed party can always just transfer the information (and there would also be no need for costly signals then). But suppose there is a conflict of interest between the informed sender and the uninformed receiver. Then which kind of information is transmittable? The seminal paper is by Crawford and Sobel. They show that, basically, very fine-grained information transmission does not work when there is a conflict of interest.
Finally, if a sender can send costless credible signals but can strategically choose which ones, we are in the domain of “Bayesian persuasion” models.
(If you can send signals that are costless and there is no conflict of interest, then we are maybe back in basic statistical theory if the signals are noisy, but I guess there is no room for an economic analysis.)
These two domains seen to capture the twin aspects of my favorite signaling topic, flirtation. “Cheap talk” is where you try and display your attractive qualities. “Bayesian persuasion” is where you reveal information, often non-verbally, in order to get someone to escalate, back off, change their tactics, and so on.
I think some of the confusion with signaling arises from the fact that the labels aren’t very intuitive and that these two domains are easy to either conflate, or focus on one at the expense of the other.
Sorry, I think that’s a misunderstanding. I will edit the part about cheap talk.