Rationalization in Signaling Games: Theory and Applications

Focusing on signaling games, I illustrate the relevance of the rationalizability
approach for the analysis multistage games with incomplete
information. I define a class of iterative solution procedures, featuring a
notion of forward induction: the Receiver tries to explain the Sender's
message in a way which is consistent with the Sender's strategic sophistication
and certain given restrictions on beliefs. The approach is applied to
some numerical examples and economic models. In a standard model with
verifiable messages a full disclosure result is obtained. In a model of job
market signaling the best separating equilibrium emerges as the unique
rationalizable outcome only when the high and low types are sufficiently
different. Otherwise, rationalizability only puts bounds on the education
choices of different types.