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The paper provides an analysis of a sender-receiver sequential signaling game. The private information of the sender is transmitted with noise by a Machine, i.e. does not always correctly reflect the state of nature. Hence, a truthful revelation by the sender of his information does not necessarily imply that the signal he sends is correct. Also, the receiver can take a correct action even if the sender transmits an incorrect signal. The payoffs of the two players depend on their combined actions. Perfect Bayesian Equilibria which can result from different degrees of noise are analysed. The Bayesian updating of probabilities is explained. The fixed point theorem which makes the connection with the idea of rational expectations in economics is calculated. Given a number of equilibria, we comment on the most credible one on the basis of the implied payoffs for both players. The equilibrium signals are an example of the formation of a language convention discussed by D. Lewis.
|Uncontrolled Keywords:||Signals and non-cooperative signaling games, Noise, States of nature, A machine, Imperfect information sets, Actions, Language convention, Nash equilibrium, Beliefs updating, Perfect Bayesian equilibrium, Fixed point, Self-fulfilling prophesies, Rational expectations equilibrium|
|Subjects:||H Social Sciences > HB Economic Theory|
|Divisions:||School of Social Sciences > Department of Economics|
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