A DYNAMIC-MODEL OF EQUILIBRIUM SELECTION IN SIGNALING MARKETS

In his work on signaling, Spence proposed a dynamic model of a market in which a buyer revises prices in light of experience and in which se llers. with private information about their types, choose utility-maxi mizing signals given these prices. We follow Spence's suggestion of in troducing perturbations into the resulting dynamic process. In a broad class of markets, our model selects a separating equilibrium outcome if and only if the equilibrium outcome satisfies a version of the unde feated equilibrium concept, whereas a pooling equilibrium outcome is s elected if and only if the equilibrium outcome is both undefeated and satisfies D1. (C) 1997 Academic Press.