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Leonardo Felli
NAB.2.14
27 February 2014
Signalling Games
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 2 / 39
Signalling Games: Example
(1, 3) r UL UR r (2, 1)
@
@ [p] L S1 R [q]
@..r r ..r
.. ..@
.. .. @
.. ... @r
r
(4, 0) DL ... .. DR (0, 0)
.. ( 12 ) ...
.. ..
.. ..
.. b N
.. R R ...
.. ..
.. ..
(2, 4) r UL .... ( 12 )
..
.. UR r (1, 0)
@ .. ..
@ ... ..
..r
@.r r
[1 − p] L S2 R [1 − q] @
@
(0, 1) r DL DR@r (1, 2)
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 3 / 39
Signalling Games: Equilibria
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 4 / 39
Signalling Games: Equilibria (cont’d)
I Bayes rule imposes that the beliefs at this information set are
the same as the probabilities with which nature takes its
choice ( 12 ) and ( 21 ).
I Bayes rule imposes that the beliefs at the two information sets
are degenerate: p ∈ {0, 1} and q ∈ {0, 1}.
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 5 / 39
Pooling Equilibria
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 6 / 39
Pooling Equilibria (cont’d)
(1, 3) r UL UR r (2, 1)
@
@ [p] L S1 R [q]
@..r r ..r
.. ..@
.. .. @
.. ... @r
r
(4, 0) DL ... .. DR (0, 0)
.. ( 12 ) ...
.. ..
.. ..
.. b N
.. R R ...
.. ..
.. ..
(2, 4) r UL .... ( 12 )
..
.. UR r (1, 0)
@ .. ..
@ ... ..
..r
@.r r
[1 − p] L S2 R [1 − q] @
@
(0, 1) r DL DR@r (1, 2)
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 7 / 39
Pooling Equilibria (cont’d)
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 8 / 39
Pooling Equilibria (cont’d)
ΠR (UR ) = q, ΠR (DR ) = 2 (1 − q)
2
q≤
3
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 9 / 39
Pooling Equilibria (cont’d)
In other words given the following Bayesian signaling game:
(1, 3) r UL UR r (2, 1)
@
@ [p] L S1 R [q]
@..r r ..r
.. ..@
.. .. @
.. ..
(4, 0) r DL ... 1
.. DR@r
.. (0, 0)
.. (2) ..
.. ..
.. ..
.. b N
.. R R ...
.. ..
.. ..
(2, 4) r UL .... 1
(2)
..
... UR
r (1, 0)
@ .. ..
@ ... ..
@.r r .r
[1 − p] L S2 R [1 − q] @
@
(0, 1) r DL DR@r (1, 2)
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 10 / 39
Recipe:
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 11 / 39
Pooling Equilibria (cont’d)
1
I Clearly Bayes rule implies that q = .
2
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 12 / 39
Pooling Equilibria (cont’d)
I This implies that there there does not exist a Pooling Perfect
Bayesian Equilibrium where S1 and S2 both choose R.
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 13 / 39
Pooling Equilibria (cont’d)
(1, 3) r UL UR r (2, 1)
@
@ [p] L S1 R [q]
@..r r ..r
.. ..@
.. .. @
.. ... @r
r
(4, 0) DL ... .. DR (0, 0)
.. ( 12 ) ...
.. ..
.. ..
.. b N
.. R R ...
.. ..
.. ..
(2, 4) r UL .... ( 12 )
..
.. UR r (1, 0)
@ .. ..
@ ... ..
..r
@.r r
[1 − p] L S2 R [1 − q] @
@
(0, 1) r DL DR@r (1, 2)
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 14 / 39
Separating Equilibria
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 15 / 39
Separating Equilibria (cont’d)
I Notice however that given R’s best reply S2 can gain a payoff
of 2 by deviating and choosing L instead of the payoff of 1 he
gets by choosing R.
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 16 / 39
Separating Equilibria (cont’d)
(1, 3) r UL UR r (2, 1)
@
@ [p] L S1 R [q]
@..r r ..r
.. ..@
.. .. @
.. ... @r
r
(4, 0) DL ... .. DR (0, 0)
.. ( 12 ) ...
.. ..
.. ..
.. b N
.. R R ...
.. ..
.. ..
(2, 4) r UL .... ( 12 )
..
.. UR r (1, 0)
@ .. ..
@ ... ..
..r
@.r r
[1 − p] L S2 R [1 − q] @
@
(0, 1) r DL DR@r (1, 2)
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 17 / 39
Separating Equilibria (cont’d)
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 18 / 39
Separating Equilibria (cont’d)
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 19 / 39
Spence Signaling Model
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 20 / 39
Timing
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 21 / 39
Educational Investment: Workers
c(e|θi )
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 22 / 39
Workers’ Preferences
I If the worker accept the wage offer w (e) then the payoff of a
worker of type θi with education e is:
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 23 / 39
Employers
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 24 / 39
Types of Equilibria: Separating Equilibria
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 25 / 39
Types of Equilibria: Pooling Equilibria
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 26 / 39
Separating Equilibria: Characterization
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 27 / 39
Separating Equilibria: Perfect Bayesian Equilibrium
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 28 / 39
Bertrand Competition
I Each employer h’s payoff is then:
f (θi ) − wh (ei )
if wh (ei ) ≥ w−h (ei )
1
Π(wh (ei )) =
2 [f (θi ) − wh (ei )] if wh (ei ) = w−h (ei )
0 if wh (ei ) < w−h (ei )
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 29 / 39
Employers’ Beliefs
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 30 / 39
Educational Investment
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 31 / 39
Low Productivity and Education
eL∗ = 0
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 32 / 39
High Productivity and Education
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 33 / 39
Off the Equilibrium Path Beliefs
I Recall that Bayes rule does not impose any constraint on the
off-the-equilibrium-path beliefs.
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 34 / 39
Off the Equilibrium Path
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 35 / 39
Multiplicity of Equilibria
eH ∈ [e, e] & eL = 0
Leonardo Felli (LSE) EC319 Economic Theory and Its Applications 27 February 2014 36 / 39