Good signals gone bad: dynamic signalling with switching efforts

TL;DR

This paper explores dynamic signalling where senders exert effort over time with noisy signals, revealing novel equilibrium behaviors such as effort switching and endogenous signal interpretation based on type expectations.

Contribution

It introduces a dynamic model of signalling with switching efforts and endogenous signal interpretation, uncovering new equilibrium outcomes not seen in static models.

Findings

High-cost senders exert more effort than low-cost ones in some equilibria.

Low-cost types can compensate for initial low effort later, high-cost types cannot.

Signal interpretation varies over time depending on receiver expectations.

Abstract

This paper examines signalling when the sender exerts effort and receives benefits over time. Receivers only observe a noisy public signal about the effort, which has no intrinsic value. The modelling of signalling in a dynamic context gives rise to novel equilibrium outcomes. In some equilibria, a sender with a higher cost of effort exerts strictly more effort than his low-cost counterpart. The low-cost type can compensate later for initial low effort, but this is not worthwhile for a high-cost type. The interpretation of a given signal switches endogenously over time, depending on which type the receivers expect to send it. JEL classification: D82, D83, C73. Keywords: Dynamic games, signalling , incomplete information