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Micro C, Lecture 16

Signaling, Renements
Gibbons 4.4

Ole Jann, ole.jann@econ.ku.dk

Fall 2013

Question from last Lecture

In our analysis of signaling theory we have seen: Only


expensive signals are good signals!

Saying I am not a cop or I am a good applicant is not


believable

Why do we sometimes believe things that other people say?

PBE  The Four Requirements

Requirement 1: Existence of beliefs at information sets

Requirement 2: Optimal behavior given beliefs

Requirement 3: On equilibrium path, beliefs are given by


equilibrium strategies and Bayes' rule

(Requirement 4: O the equilibrium path, beliefs are given by


strategies and Bayes' rule where possible)

This often says nothing about beliefs o equilibrium path!

Do all PBE make sense?

1
L

2,2

M
2

A
3,1

B
0,0

Perfect Bayesian Equilibria:

A
1,0

B
0,1

Do all PBE make sense? (2)

Consider

R , B , p 21

Player 2 has the belief Pr(M ) Pr(L)

Another Example

D
1
L

1,3

2,2

M
2

3,1

In equilibrium:

B
0,0

A
1,0

B
0,1

Strict Domination at Information Set

Some beliefs o the equilibrium path are simply implausible

We need to restrict beliefs o the equilibrium path

Denition

i has the move. The


strategy s is strictly dominated beginning at this information set if
there exists another s that is always better given that the

Consider an information set where player


0

information set has been reached.

Requirement 5

Requirement 5
If possible, each player's beliefs o the equilibrium path should
place zero probability on nodes that are reached only if another
player plays a strategy that is strictly dominated beginning at some
information set.

Intuition: Players know that other players are rational and will
never play a strictly dominated strategy

Their beliefs are reasonable = they don't believe others will


play strictly dominated strategies

If possible  sometimes it isn't (see next slide)

If possible  Example

2,2

M
2

1,1

0,0

L and M

1,1

B
0,1

Both

But we cannot put zero beliefs on both!

Requirement 5 doesn't apply (not possible)

are strictly dominated by

Requirement 5 in Signaling Games


3, 2

u
[p]

2, 0

Nature
1
2

u
L

1, 1

t2

[q]
d

1
2

R
1, 0

t1

1, 0

0, 1

R
u

2, 1

R
d

0, 0

Find a PBE in which the sender plays

(L, L).

Signaling Requirement 5

Dominated Messages

The message
message

for

than

is dominated for type

if there exists another

so that no matter what the receiver does,

m.

m0
j

is better

Signaling Requirement 5
If the information set following

is dominated for type

t , then

is o the equilibrium path and

(t |m ) = 0
i

if

is not dominated for all types (if possible).

Another Example (Beer Quiche)


1, 1

u
[p]

3, 0

[q]
d

Nature
0.9

u
L

2, 0

0.1
R

0, 1

t1

t2

0, 1

2, 0

R
u

1, 1

R
d

3, 0

Pooling PBE:

SR5 is satised (nothing is dominated)

But: Why should

t1 choose R

instead of

L?

Requirement 6

Equilibrium Domination
Given a PBE in a signaling game, the message
dominated for type

is equilibrium

if the utility from sending message

always lower than the utility

is

gets in the equilibrium.

Signaling Requirement 6: The Intuitive Criterion

m is o the equilibrium path and


m is equilibrium dominated for t , then
If the information set following
j

(t |m ) = 0
i

Every strictly dominated message is equilibrium dominated,


but not the other way around!