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Actions taken not for the sake of their direct results, but to inform prospective customers or employers. For example, students may seek qualifications through formal examinations even though they have no interest in a subject, and it is well known that it will be of no use to them in actually doing a job. This is rational conduct if they believe that prospective employers will regard success in examinations as signalling ability, so that such success helps obtain a good job. Signalling is a consequence of asymmetric information and involves the informed party actively trying to reveal information. A signal will be believed only if it is costly to transmit, so that in equilibrium it is optimal for some types to transmit the signal but not optimal for other types. For example, an educational qualification works as a signalling device only if it is costly to obtain, and worth obtaining only by individuals with high ability.

Subjects: Economics.

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