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Designing a Competitive Monotone Signaling Equilibrium

Seungjin Han (), Alex Sam and Youngki Shin ()

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Abstract: In this paper we consider a generalized competitive signaling model with two-sided matching. A decision maker (DM) sets the support of reactions that receivers can choose before senders and receivers sequentially choose their actions and reactions. Adopting the proposed methodology, the DM can build the optimal design of a unique stronger monotone signaling equilibrium, which maximizes the aggregate net surplus. Our analysis sheds light on how the trade-off between matching efficiency and signaling costs affects optimal equilibrium designing. We further clarify how the trade-off depends on the relative heterogeneity between receiver and sender types and on the (direct) productivity effect of the sender's action. Specifically, the DM's equilibrium design is most effective (i) when the receiver type distribution has the smallest mean and variance; and (ii) when the sender's action has no productivity effect. The DM's equilibrium design quickly loses its effectiveness as the mean/variance of the receiver type distribution increases or the productivity effect of the sender's action increases.

Date: 2021-09, Revised 2022-07
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