Economic and psychological theories to cope with information asymmetries

Viac o knihe

In a world filled with uncertainty, decisions are often made with asymmetrically distributed information. Signalling emerges as a mechanism to enhance transparency and differentiate markets. For instance, a seller may offer a warranty to signal reliability to customers. This approach relies on the receivers' ability to interpret signals as intended. To process incoming information efficiently, our cognitive systems create patterns that group similar features, leading to stereotypes when applied to individuals. The labour market exemplifies this, with applicants showcasing their skills through education and certifications. However, obtaining education incurs significant time and transaction costs, compelling applicants to find an "optimal" level of education to bridge the informational gap while minimizing costs. The interplay between economic signalling and cognitive stereotyping reveals commonalities that can result in various market equilibria. The degree of asymmetric information in the labour market is influenced not only by the signals themselves but also by how they are cognitively processed. Market separation is often sought when the costs of transactions and cognitive efforts are manageable. Additionally, the social advantages of being recognized as a high-ability worker can lead to excessive investments in education, potentially destabilizing equilibria. Individual signalling choices may diverge from group behavior, i