Separating equilibrium
Different types end up behaving differently, so watching what someone does tells you which type they are.
Often misread asVerifying only that the strong type gains from signalling, and never testing whether the weak type would rather copy the signal and be mistaken for the strong one.
How to see it
Different types do different things, so the action reveals the type
In a separating equilibrium each type of informed player takes a different action, so observing the action identifies the type exactly. Holding that together takes two conditions at once: the strong type must find its action worth the cost, and the weak type must find imitating that action too expensive to be worth the better treatment.
The checkBoth incentive constraints must hold simultaneously, and the imitator's is usually the one that binds.
Try itChoose an education level the able type is happy to buy. Now compute the less able type's payoff from buying exactly that much and being treated as able. If that beats their honest payoff, your candidate separating equilibrium does not exist.
Games that show it
Know these first
Easily confused with
Sources
- Spence, M. (1973). Quarterly Journal of Economics 87(3), 355-374.
- Fudenberg, D. & Tirole, J. (1991). MIT Press.