Category Archives: Signaling

Optimally Informative Rankings and Consumer Search

14 Friday Nov 2025

Posted by in Academic Research, Digital Economics, Learning, Platforms, Signaling, Strategy

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Online platforms (and multi-product firms) generate lists of products (or services) in response to consumer search queries. In ranking these products, platforms draw on their vast amount of information about past consumer search behavior and their purchase history. In “Optimally Informative Rankings and Consumer Search” (joint with Maarten Janssen, Marcel Preuss and Cole Williams), we investigate how much of their pertinent information platforms convey through their rankings of products.

When consumers engage in costly search and expect to find some products they like better and others they like less, they are updating their expectations about the remaining alternatives whenever they inspect a product. As a result, three scenarios ensue: 1) If they like a product very much, they immediately buy. 2) If they strongly dislike a product, they become more optimistic about the remaining alternatives and continue searching. 3) If however, the consumer is fairly indifferent about a product, they may neither buy it nor continue to search as their experience does not induce sufficient optimism about the remaining products. In turn, they abort search altogether without buying a product.

Scenario 3) is a novel finding about consumer search with learning and has meaningful implications for platforms and their regulators. Understanding optimal consumer search behavior, we derive the optimal platform ranking of two products, one of which promises a higher value for the consumer (in expectation) and one a lower value. The more informative the platform’s ranking, i.e., the higher the probability it puts the higher-value product in the first position of their ranking, the higher the likelihood the consumer (inspects and) buys the first product. However, if the consumer does not like the first product, they are less likely to inspect the second the more informative the ranking, i.e., the less likely the product in the second position is the higher-value product.

It turns out that the platform optimally chooses to obfuscate their ranking to increase the probability of the consumer to inspect both products when consumer search cost (i.e., their implicit cost of inspecting another item) is low, but to provide a fully informative ranking to increase the probability the consumer buys the first product if the consumer’s search cost is high. Interestingly, the platform provides either less information than would be necessary to induce search of the second product, or more information than necessary to ensure the consumer’s participation in search in the first place. An intriguing result of our findings is that platform and consumer welfare are aligned only if search cost is high (in which case the platform maximizes social welfare) but at odds with each other when search cost is low.

Education Signaling and Employer Learning Heterogeneity

12 Wednesday Nov 2025

Posted by in Academic Research, Education, Labor, Learning, Organization, Signaling

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It is well known that individuals choose to obtain higher education degrees to signal their ability to potential employers (Education Signaling), and that employers learn about their workers’ abilities from observing their output over time (Employer Learning). The quicker and the more accurate employers learn about their workers, the less important education is as a signal of their ability.

In “Education Signaling and Employer Learning Heterogeneity,” (joint with Yuhan Chen and Michael Waldman), we investigate the consequences of combining these fundamental concepts of Labor Economics. In particular, we exploit the fact that the importance of teamwork and other determinants of the observability of individual output not under the worker’s control vary across industries (and occupations).

When industries differ in their speed (or accuracy) of employer learning, higher-ability workers tend to prefer a faster-learning environment. This is because they prefer their compensation depends on their own output, a function of their ability, rather than on the ability of others choosing the same education signal (e.g., degree). This is not the case for lower-ability workers, however, who benefit when the average ability of those choosing the same education is a determinant of their compensation. This finding has several important consequences.

First, as higher-ability workers face a strong incentive to choose a faster- rather than a slower-learning industry, they even join the faster-learning industry if they are more productive in the slower-learning industry. In other words, a sorting distortion regarding industry choice arises and lowers social welfare. Second, for any given education level, higher-ability workers choose a faster-learning industry. As a result, industry choice itself is a signal of worker ability on which employers condition their learning. Third, the sorting distortion across industries lowers education investment for signaling purposes, increasing social welfare.

We show that the logic of our results persists across industries with symmetric and asymmetric employer learning components, i.e., whether the worker’s current employer is better informed about their ability than their competitors. Likewise, our results are robust to different bidding specifications among firms, i.e., whether firms engage in simultaneous bidding for workers, or the worker’s current employer can submit counteroffers.

A variant of our model in which workers learn their productivity difference across industries before they choose their education level offers a potential explanation for a heretofore neglected labor market “puzzle:” why do few of the economically most successful individuals in real-world labor markets hold higher education degrees? We show that fewer workers that join a faster-learning industry choose higher education levels. In particular, if industries or occupations differ greatly in their speed or asymmetry of learning, it may be the the highest ability individuals in a faster-learning industry or occupation that achieve the highest lifetime wages but choose a low education level. The non-monotonicity of education levels in ability in our model is novel, and lends itself well to explain the success of entrepreneurs choosing low education levels or to drop out of school. Finally, we discuss the testable implications of our theory, and how it connects to existing empirical work.

Actions and Signals

24 Sunday Dec 2023

Posted by in Education, Signaling

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In the canonical signaling model, a sender holding private information about her type chooses an action to change the beliefs of uninformed receivers about her type, e.g., a (future) worker chooses a higher education level to signal her ability. In other words, the chosen action serves as a signal of her privately known type. There are numerous examples of real-world settings that feature signaling, however, that work differently.

Suppose that, instead, the sender privately observes her type, and choses unobservable actions that together with her type determine an observable outcome, which acts then as a signal of both the sender’s type and her chosen actions. For example, consider the college attended by a worker. A more prestigious institution serves as a signal of both the innate ability or skill of the worker as well as of her effort in high-school and in studying for standardized tests. The worker, however, clearly does not choose her college, but her effort in high-school, volunteering, test prep, etc.

In “Actions and Signals,” co-authored with my colleague Mike Waldman, we introduce a generalized model of signaling that captures strategic incentives in these environments. We show that in equilibrium, a fundamentally different behavior than in the canonical signaling model, a special case of our framework, can arise.

If an action and a signal are one and the same, receivers know the sender’s action, and infer her type from the signal. In this scenario, over-investment, i.e. the sender choosing an action (=signal) that exceeds its efficient level, ensues (independent of whether the action is productive or not). This is because the sender gets rewarded for her action (as observed by receivers) but chooses an even higher level of the action to communicate that she is a higher type sender.

On the other hand, if an unobservable action and the sender’s type combine to generate an observable outcome that serves as a signal of both the action and her type, a different logic applies. When the sender chooses a higher level of the action, the signal increases. Receivers attribute some of this increase to a higher action and some of the increase to a higher type. As a result, equilibrium behavior of the sender depends on how the action and the sender’s type contribute to the observable signal vs. how they contribute to the sender’s output (for which receivers pay). In fact, if the action chosen by the sender is less important (relative to her type) for the signal than her output, under-investment results.

In terms of education signaling, this means that in cases where effort in high-school is of importance for future job-performance, the worker may choose an inefficiently low level of effort if it does not equally increase the quality of the college she will attend. We discuss education as well as third-party reviews such as rating systems or certification as two of the (many) applications of our model, and argue why the specific determinants in a signaling environment will be the drivers of efficiency in terms of over- or under-investment by the sender (or potentially both in the case of multiple actions).

We furthermore introduce incomplete sender information that allows us to span an environment with signaling (sender perfectly knows her type) and signal jamming (sender is uninformed) as the extreme cases, and show that uninformed sender behavior may be more efficient than that of a well-informed one. Finally, we discuss the tradeoffs between multiple actions and deal with productive signals, i.e., when the signal realization itself increases sender output.

George Santos and the ambiguous effects of resume padding: the costs and benefits of lying and misrepresentation in the job market

30 Friday Dec 2022

Posted by in Education, Signaling

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Elected congressman George Santos has recently been subject of public scrutiny after it became known that he has repeatedly lied about his life achievements and personal background. His case, however, is hardly a one off. Resume padding, the misrepresentation of one’s personal history to increase job market attractiveness, is a common place phenomenon. While the detection of resume padding almost always leads to a breakdown of relationships due to an irrevocable loss of trust, the social effect of resume padding is more complex as explained in our paper “Self-Reported Signaling” (w Michael Waldman).

New York Congressman elect George Santos, preparing to take his seat in January, is facing strong headwinds amid calls to resign before even taking office. These demands came after it was revealed by the New York Times on December 19 that Mr. Santos has repeatedly and blatantly lied about his education and work credentials, charitable undertakings  and even his personal background. Journalists were neither able to verify his self-proclaimed working experience on Wall Street for Citigroup and Goldman Sachs, nor is there any record of him ever attending Baruch College as claimed on his biography. There is also hardly any evidence for his involvement in a dog rescue charity organization, Friends of Pets United, an activity he heavily leveraged on the campaign trail. Even claims in his online biography (now taken down) that his grandparents fled Jewish persecution in Europe have since been called in question.

After initially accusing the New York Times through his lawyer of an unsubstantiated vendetta against his persona, Mr. Santos has since apologized for “embellishing his resume,” and “a poor choice of words” in multiple interviews (New York Post, City and State New York) without taking responsibility for misrepresenting his life accomplishments and even his heritage. It is without question that Mr. Santos’ actions show a grave lack of respect for his constituents as well as at least an indifference towards others, such as people personally affected by the Holocaust.

The willingness to lie so blatantly for his own benefit without any regard for consequences is rightfully interpreted by many as a major character flaw for a public servant. Many raise questions how voters and Mr. Santos’ peers alike would ever be able to take his word for granted, and others ask whether his actions may even warrant criminal prosecution (NBC).

While I personally support these viewpoints and believe that Mr. Santos’ actions do indeed necessitate a legal sequel, particularly as it can be argued that his lying directly affected donations towards his candidacy, Mr. Santos’ story is blatant but hardly unique. In fact, he is only one among many who helped themselves to a position of power through misrepresentation of background and achievements. Resume padding is a common phenomenon employed as tactics by Chief Financial Officers, College Football Coaches, and even Prime Ministers. The detection of such a lie frequently triggers resignation or termination and even lawsuits. These are understandable consequences of the loss of trust in a person having catapulted herself into a position of power and decision making, and often, wealth.

Social consequences of resume padding, however, are much more involved, and potentially ambiguous. If lying about achievements and background is a common phenomenon, decision makers such as employers or even voters in turn will put less emphasis on these credentials when making hiring or promotion decisions. In turn, it becomes less attractive for a job-seeker or political candidate to engage in amassing these costly credentials, especially for those who face a harder prospect of doing so in the first place.

The standard theory of signaling teaches us that whenever engagement in costly activities such as education allows for inferences about personal ability, those who are vying for opportunities will overinvest in these activities/credentials. In other words, job seekers and political candidates will over-educate, build an overly packed working resume or engage in too many extra-curricular or charitable activities. By the logic above, the presence of resume padding, i.e., lying about these credentials, then lowers this overinvestment.

My co-author Michael Waldman and I detail this argument in our paper “Self-Reported Signaling,” forthcoming in the American Economic Journal: Microeconomics. Note that our theory relies on the (realistic) assumption that fact-checking a resume is costly, as otherwise the truth would be readily available to everyone. (Mr. Santos story strongly supports this assumption as it took investigative journalism by the New York Times to uncover inconsistencies in his story.) It follows that the overall effect of resume padding depends on the trade-off between the cost of mismatch, auditing and the breakdown of relationships with the benefit of a reduction in the over-investment in costly activities. While blunt misrepresentation such as in Mr. Santos’ case likely leads to welfare loss due to the irrevocable loss of trust, the social effect of more moderate but systematic resume padding is not necessarily negative.

Self-reported actions, signaling, and auditing

05 Friday Jun 2020

Posted by in Academic Research, Signaling

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Actions that affect the value of a service are often self-reported rather than publicly observable. The diligence of a contractor, the education level of job applicant, or the true mileage of a used car are typically reported by the seller. This opens the door for lying and misrepresentation.

In “Self-Reported Actions, Signaling, and Auditing,” my co-author Mike Waldman and I present a model in which multiple receivers bid for the service of a sender, the value of which depends on a action taken by the sender. Instead of the action itself, receivers only observe a message reported by the sender indicating which action was taken. Receivers may opt for costly auditing to verify that the message matches the action.

We find that lying may increase social welfare when the action serves as a signal of a desirable trait of the sender. A positive likelihood of misrepresentation lowers the value of the action as a signal, and therefore counteracts the well-known over-investment result in the signaling literature. Therefore, factors that promote misrepresentation, such as a lower disutility of lying or a higher auditing fee, may increase social welfare.

This result stands in stark contrast to cases in which the action does not signal the sender’s type. We also find that the level of auditing is inverse U-shaped in the probability of the sender being dishonest, and that receivers may audit more often if the action does not serve as a signal, despite gaining less information when auditing. We apply our insights to education signaling, college applications, and odometer fraud in the used car market.

Find the full text paper HERE . I will present it at this year’s virtual editions of the EEA and the ESWC.