The Dynamics of Costly Signaling

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Abstract
Costly signaling is a mechanism through which the honesty of signals can be secured in equilibrium, even in interactions where communicators have conflicting interests. This paper explores the dynamics of one such signaling game: Spence’s model of education. It is found that separating equilibria are unlikely to emerge under either the replicator or best response dynamics, but that partially communicative mixed equilibria are quite important dynamically. These mixtures are Lyapunov stable in the replicator dynamic and asymptotically stable in the best response dynamic. Moreover, they have large basins of attraction, in fact larger than those of either pooling or separating equilibria. This suggests that these mixtures may play significant, and underappreciated, roles in the explanation of the emergence and stability of information transfer.

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