Stanford MS&E 246 - Lecture 16 - Signaling games (26 pages)

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Lecture 16 - Signaling games



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Lecture 16 - Signaling games

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Pages:
26
School:
Stanford University
Course:
Ms&E 246 - Financial Risk Analytics

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MS E 246 Lecture 16 Signaling games Ramesh Johari Signaling games Signaling games are two stage games where Player 1 with private information moves first His move is observed by Player 2 Player 2 with no knowledge of Player 1 s private information moves second Then payoffs are realized Dynamic games Signaling games are a key example of dynamic games of incomplete information i e a dynamic game where the entire structure is not common knowledge Signaling games The formal description Stage 0 Nature chooses a random variable t1 observable only to Player 1 from a distribution P t1 Signaling games The formal description Stage 1 Player 1 chooses an action a1 from the set A1 Player 2 observes this choice of action The action of Player 1 is also called a message Signaling games The formal description Stage 2 Player 2 chooses an action a2 from the set A2 Following Stage 2 payoffs are realized 1 a1 a2 t1 2 a1 a2 t1 Signaling games Observations The modeling approach follows Harsanyi s method for static Bayesian games Note that Player 2 s payoff depends on the type of player 1 When Player 2 moves first and Player 1 moves second it is called a screening game Application 1 Labor markets A key application due to Spence 1973 Player 1 worker t1 intrinsic ability a1 education decision Player 2 firm s a2 wage offered Payoffs 1 net benefit 2 productivity Application 2 Online auctions Player 1 t1 a1 Player 2 a2 Payoffs seller true quality of the good advertised quality buyer s bid offered 1 profit 2 net benefit Application 3 Contracting A model of Cachon and Lariviere 2001 Player 1 manufacturer t1 demand forecast a1 declared demand forecast contract offer Player 2 supplier a2 capacity built Payoffs 1 profit of manufacturer 2 profit of supplier A simple signaling game Suppose there are two types for Player 1 and two actions for each player t1 H or t1 L Let p P t1 H A1 a b A2 A B A simple signaling game Nature moves first Nature A simple signaling game Nature moves first H Nature L A



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