The market for lemons and information theory

Robert Mamada

Mathematical Social Sciences, 2022, vol. 120, issue C, 107-112

Abstract: Spence’s theory of signaling shows that signals can resolve adverse selections in job markets. Instead of signals, I consider what Spence calls indices and show that if the costs of knowing the indices are not nil, they could play the role of resolving adverse selection in sequential Bayesian games. I also show that by incorporating costs that are measured by the mutual information of indices, adverse selection can be resolved if the costs fall within a certain range.

Keywords: Adverse selection; Index; Information theory; Mutual information; Sequential Bayesian game (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:matsoc:v:120:y:2022:i:c:p:107-112

DOI: 10.1016/j.mathsocsci.2022.10.002

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