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Small Noise in Signaling Selects Pooling on Minimum Signal

Ennio Bilancini and Leonardo Boncinelli ()

Center for Economic Research (RECent) from University of Modena and Reggio E., Dept. of Economics "Marco Biagi"

Abstract: In this paper we study how the presence of a small amount of noise in signaling games impacts on the likelihood of separation and, hence, the likelihood of information transmission. We consider a variant of a standard signaling model where a source of exogenous noise affects the signals that agents observe. Noise, even if tiny, poses tight constraints on beliefs by making all signals possible along the equilibrium path. We show that separation cannot be obtained in equilibrium if the noise is small enough - but not nil. In particular, for any separating profile, if noise is suciently small then the sender has a profitable deviation consisting of a signal reduction. Instead, the pooling equilibrium where all sender's types pool on the minimum signal always exists, independently of the level of noise. These results provide a new source of interest in pooling equilibria.

Keywords: noise; separation; pooling; information transmission. (search for similar items in EconPapers)
JEL-codes: D82 D83 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta and nep-mic
Date: 2014-06
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