How Wasteful is Signaling?

Alex Frankel and Navin Kartik
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Alex Frankel: University of Chicago, Booth School of Business
Navin Kartik: Yale University, Department of Economics

No 2495, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: Signaling is wasteful. But how wasteful? We study the fraction of surplus dissipated in a separating equilibrium. For isoelastic environments, this waste ratio has a simple formula: B/(B+S)$ where B is the benefit elasticity (reward to higher perception) and S is the elasticity of higher types' relative cost advantage. The ratio is constant across types and independent of other parameters, including convexity of cost in the signal. A constant waste ratio characterizes the isoelastic class. In winner-take-all signaling tournaments with N candidates, exactly $(N-1)/N of the surplus dissipatesÑthe same as in Tullock contests.

Pages: 23 pages
Date: 2026-01-20
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