Signalling
Also called: Market signalling · Topic: Market Structures, Market Failure and Competition · NCERT: Beyond NCERT
Meaning
Signalling is a costly action taken by the better-informed side of a deal to prove something the other side cannot see. The signal is believable because a low-quality seller would find it too costly to copy. Michael Spence developed the idea in 1973 and shared the 2001 Nobel for it. Signalling helps markets work when buyers cannot judge quality for themselves.
Example
- A degree signals a job-seeker's ability to employers.
- A long warranty signals that a product is well made.
- In India, certification marks let sellers show quality that buyers cannot check themselves. Examples are the BIS hallmark on gold, the ISI mark, AGMARK, the FSSAI logo and the BEE star rating.
Don't confuse with
- Screening: the less-informed side acts to draw out the hidden information, as when an insurer asks for a medical test. In signalling the better-informed side makes the move.