1. Signalling Todd Kaplan Haifa

2. Youtube Video Link to youtube car

3. What was that about? 1. Todd is spending too much time watching youtube. 2. Woman shallowly likes the guy for his money. 3. Woman rationally believes the man’s car means that he is likely to have a decent job, education and high intelligence and less likely to live at home with mom. 4. Easy way to make $200,000 on youtube.

4. Peacock

5. Experiment game We ran an experiment on what is called the Beer-Quiche Game (Cho & Kreps, 1987). Proposer has 2/3 chance of being strong. He can eat Beer or Quiche. Strong types like Beer. Weak types like Quiche. Responder can fight or flee. Responders don’t want to fight a strong type.

6. Treatment 1 Payoffs: Proposer, Responder FleeFight Beer (Strong)$2.00, $1.25$1.20, $0.75 Quiche (Strong)$1.00, $1.25$0.20, $0.75 Beer (Weak)$1.00, $0.75$0.20, $1.25 Quiche (Weak)$2.00, $0.75$1.20, $1.25

7. Treatment 2. Payoffs: Proposer, Responder FleeFight Beer (Strong)$1.40, $1.25$0.60, $0.75 Quiche (Strong)$1.00, $1.25$0.20, $0.75 Beer (Weak)$1.00, $0.75$0.20, $1.25 Quiche (Weak)$1.40, $0.75$0.60, $1.25

8. Signalling in the Lab: Treatment 1 Payoffs: Proposer, Responder FleeFight Beer (Strong)$2.00, $1.25$1.20, $0.75 Quiche (Strong)$1.00, $1.25$0.20, $0.75 Beer (Weak)$1.00, $0.75$0.20, $1.25 Quiche (Weak)$2.00, $0.75$1.20, $1.25 For a strong proposer, (Beer, flee)> (Beer, fight)>(Quiche, flee)>(Quiche, fight). For a weak proposer, (Quiche, flee)>(Quiche, fight)>(Beer, flee)>(Beer, fight). Strong chooses Beer and Weak chooses Quiche

9. Signalling in the Lab: Treatment 1 Payoffs: Proposer, Responder FleeFight Beer (Strong)$2.00, $1.25$1.20, $0.75 Quiche (Strong)$1.00, $1.25$0.20, $0.75 Beer (Weak)$1.00, $0.75$0.20, $1.25 Quiche (Weak)$2.00, $0.75$1.20, $1.25 Responder now knows that Beer is the choice of the strong type and Quiche is the choice of the weak type. For Beer he flees, for Quiche he fights.

10. Signalling in the Lab: Treatment 1 Payoffs: Proposer, Responder FleeFight Beer (Strong)$2.00, $1.25$1.20, $0.75 Quiche (Strong)$1.00, $1.25$0.20, $0.75 Beer (Weak)$1.00, $0.75$0.20, $1.25 Quiche (Weak)$2.00, $0.75$1.20, $1.25 So the equilibrium is For strong, (Beer, Flee) For weak, (Quiche, Fight) This is called a separating equilibrium. Any incentive to deviate?

11. Signalling in the Lab: Treatment 1 Payoffs: Proposer, Responder FleeFight Beer (Strong)$2.00, $1.25$1.20, $0.75 Quiche (Strong)$1.00, $1.25$0.20, $0.75 Beer (Weak)$1.00, $0.75$0.20, $1.25 Quiche (Weak)$2.00, $0.75$1.20, $1.25 What did you do? In the last round, there were 21 Strong and 10 Weak proposers 5 14 7 5

12. Treatment 2. Payoffs: Proposer, Responder FleeFight Beer (Strong)$1.40, $1.25$0.60, $0.75 Quiche (Strong)$1.00, $1.25$0.20, $0.75 Beer (Weak)$1.00, $0.75$0.20, $1.25 Quiche (Weak)$1.40, $0.75$0.60, $1.25 Can we have a separating equilibrium here?. If the proposer is weak, he can choose Beer and get $1.00 instead of $0.60.

13. Treatment 2. Payoffs: Proposer, Responder FleeFight Beer (Strong)$1.40, $1.25$0.60, $0.75 Quiche (Strong)$1.00, $1.25$0.20, $0.75 Beer (Weak)$1.00, $0.75$0.20, $1.25 Quiche (Weak)$1.40, $0.75$0.60, $1.25 Can choosing Beer independent of being strong or weak be an equilibrium? Yes! The responder knows there is a 2/3 chance of being strong, thus flees. This is called a pooling equilibrium.

14. Treatment 2. Payoffs: Proposer, Responder FleeFight Beer (Strong)$1.40, $1.25$0.60, $0.75 Quiche (Strong)$1.00, $1.25$0.20, $0.75 Beer (Weak)$1.00, $0.75$0.20, $1.25 Quiche (Weak)$1.40, $0.75$0.60, $1.25 Did we have a pooling equilibrium? In the last round there were 23 strong proposers and 8 weak proposers. Do you think there is somewhat to help the pooling equilibrium to form? 13 8 3 4 1 1 1

15. Treatment 2. Payoffs: Proposer, Responder FleeFight Beer (Strong)$1.40, $1.25$0.60, $0.75 Quiche (Strong)$1.00, $1.25$0.20, $0.75 Beer (Weak)$1.00, $0.75$0.20, $1.25 Quiche (Weak)$1.40, $0.75$0.60, $1.25 At Texas A&M, the aggregate numbers were shown. In the last 5 periods, 23 proposers were strong and 17 weak. 23 3 14

16. Signalling game Spence got the Nobel prize in 2001 for this on signalling in education. There are two players: A and B. Player A is either strong or weak. –Player B will chose one action (flee) if he knows player A is strong –and another action (fight) if he knows player A is weak. Player A can send a costly signal to Player B (in this case it was to drink beer).

17. Signal For signalling to have meaning, –we must have either cost of the signal higher for the weak type. –Or the gain from the action higher for the strong type.

18. Types of equilibria Separating. –Strong signal –Weak don’t signal. Pooling. –Strong and weak both send the signal. –(or Strong and weak both don’t send the signal.)

19. Types of equilibria Player A is the proposer and B the responder. The types of player A are s and w. Let us normalize the value to A when B fights to 0. The values to A when B flees are Vs and Vw. The cost to signalling (drinking beer) are Cs and Cw. We get a separating equilibria if Vs-Cs>0 and Vw-Cw<0. We get a pooling equilibria if Vs-Cs<0 and Vw-Cw<0 (no one signals). We may also get a pooling equilibria if Vs-Cs>0 and Vw- Cw>0 and there are enough s types. –For this to happen, there must be enough s types such that the expected payoff of B is higher fleeing than fighting.

20. Treatment 2: Other pooling?. Payoffs: Proposer, Responder FleeFight Beer (Strong)$1.40, $1.25$0.60, $0.75 Quiche (Strong)$1.00, $1.25$0.20, $0.75 Beer (Weak)$1.00, $0.75$0.20, $1.25 Quiche (Weak)$1.40, $0.75$0.60, $1.25 How about both proposers eat quiche and the responder flees? Is this an equilibrium? If responders think anyone who drinks Beer must be weak. Cho-Kreps introduce an “intuitive criteria” that says this does not make sense. Any proposer drinking Beer must be strong, because the weak type can only lose from doing so.

21. Economics of Seinfeld Youtube link to the Economics of Seinfeld

22. Gifts as Signals? Basically, you get someone a gift to signal your intent. Gift giving can be wasteful. (Why not give $$$?) –Signal also indicates how well you know the person. American Indian tribes, a ceremony to initiate relations with another tribe included the burning of the tribe’s most valuable possession.

23. Courtship gifts. Dating Advice. Advice 1: never take such advice from an economist. Advice 2: –Say that there is someone that is a perfect match for you. You know this, they just haven’t figured it out yet. –Offer to take them to a really expensive place. –It would only make sense for you to do this, if you knew that you would get a relationship out of it. –That person should then agree to go.

24. Valentine’s Day Who bought a card, chocolate, etc? We are forced to spend in order to signal that we “really” care. Say that you are either serious or not serious about your relationship. If your partner knew you were not serious, he or she would break up with you. A card is pretty inexpensive, so both types buy it to keep the relationship going. Your partner keeps the relationship since there is a real chance you are serious. No real information is gained, but if you didn’t buy the card, your partner would assume that you are not serious and break up with you.

25. Higher value and/or Lower Cost Higher value You buy someone a gift to signal that you care. Sending a costly signal means that they mean a lot to you. For someone that doesn’t mean so much, you wouldn’t buy them such a gift. Lower cost The person knows you well. Shopping for you costs them less. They signal that they know you well.

26. Simplified Poker. Payoffs: Player A, Player B FoldCall Raise (Strong)$1.00, -$1.00$2.00, -$2.00 Fold (Strong)-$1.00, $1.00 Raise (Weak)$1.00, -$1.00-$2.00, $2.00 Fold (Weak)-$1.00, $1.00 Assume the odds of a strong hand is 80%. Find any equilibrium. Is it signalling or pooling? Extra hard: what happens if it is 60%?

27. Signalling in Business An advantage of vertical integration is that there will be less information asymmetries between parties. This can break down exchange: – market for lemons. Lesson here is that sometimes one firm can still signal to another their information –Separating: less of a need. –Pooling: this doesn’t always work. Praying. –Benefits to being member of a religion. –Cost to Praying higher for non-believers. Mobile phone for Orthodox Jews Showing up to class. Limit pricing. –Firms want to signal that they are strong and charge a low price to deter entry.

28. Business Signalling Entrepreneur –May make big sacrifice to show investors they mean business. –Drop out of Harvard to start a company/remortgage your house/etc.. Limit pricing. –Firms want to signal that they are strong and charge a low price to deter entry.

29. Other types of signalling in the world Praying. –Benefits to being member of a religion. –Cost to Praying higher for non-believers. Mobile phone for Orthodox Jews Showing up to class.