Equilibrium Selection in the Spence Signaling Game

Abstract

The paper studies the most simple version of the Spence job market signaling model in which there are just two types of workers while education is not productivity increasing. To eliminate the multiplicity of equilibria, the general equilibrium selection theory of John Harsanyi and Reinhard Selten is applied. It is shown that without invoking Pareto comparisons, the Harsanyi/Selten theory selects Wilson’s E ₂ -equilibrium as the solution. The main elements in the analysis are the study of primitive equilibria and of the tracing procedure. The analysis sheds light on the “evolutive” and the “eductive” aspects of Harsanyi and Selten’s theory and it also allows a better understanding of the older, non game theoretic literature on signaling.

Supported in part by the Sonderforschungsbereich 303 (DFG), Institut für Operations Research, Universität Bonn, W. Germany. The research was carried out while the authors participated in the research group ‘Game Equilibrium Models’ at the Center for interdisciplinary research of the University of Bielefeld.