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 2495R1, 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 + o), where B is the benefit elasticity (reward to higher perception) and o is the elasticity of higher typesÕ relative cost advantage. The ratio is constant across types and is independent of other parameters, including convexity of cost in the signal. We show that the directional effects of B and o on waste extend to non-isoelastic environments.

Pages: 7 pages
Date: 2026-04-15
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