Econometrica: May, 1987, Volume 55, Issue 3

Equilibrium Selection in Signaling Games

https://doi.org/0012-9682(198705)55:3<647:ESISG>2.0.CO;2-T
p. 647-661

Jeffrey S. Banks, Joel Sobel

This paper studies the sequential equilibria of signaling games. It introduces a new solution concept, divine equilibrium, that refines the set of sequential equilibria by requiring that off-the-equilibrium-path beliefs satisfy an additional restriction. This restriction rules out implausible sequential equilibria in many examples. We show that divine equilibria exist by demonstrating that a sequential equilibrium that fails to be divine cannot be in a stable component. However, the stable component of signaling games is typically smaller than the set of divine equilibria. We demonstrate this fact through examples. We also present a characterization of the stable equilibria in generic signaling games.