Signalling
Definition. Signalling is an action taken by the better informed party in a market to credibly convey private information to the less informed party, helping to overcome a problem of asymmetric information. A classic example is a job applicant gaining a qualification to signal underlying ability to employers.
For a signal to work it must be costly enough that low quality types would not find it worthwhile to imitate. Signalling helps separate high and low quality, reducing the risk of adverse selection.
This term belongs to Asymmetric Information in A Level Economics. Read the full chapter for the diagrams, worked examples and exam technique.
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