Signaling and Costs
By Arnold Kling
when you make signaling cheaper, agents’ natural response is to signal more intensely or on another dimension.
My understanding of the signaling model is that it depends crucially on the relative cost of signaling to people with and without the desired trait. You want the cost to be high for someone without the trait and low for someone with the trait.
With that in mind, I do not see how lowering the cost of signaling for people with the trait does anything other than cause people with the trait to choose the low-cost signal. The problem with a low-cost substitute for a diamond is that it lowers the cost of signaling for people without the desired trait (which is a willingness to buy an expensive gift).
If I come up with a low-cost way to earn a badge that signals intelligence, conscientiousness, and conformity, and that badge can only be earned by people with those traits, then my badge should find a market. One challenge is that when few people use the badge, it seems to signal non-conformity. Thus, the early adopters of my cheaper badge do not do as well as they should. But over time, there are two possibilities. One is that the conformity hurdle cannot be overcome, so that the incumbent signaling mechanism remains dominant forever. The other possibility is that eventually a tipping point is reached, and enough people use the new badge so that it no longer signals nonconformity. At that point, the market position of the old badge rapidly deteriorates.
I think that we will arrive at the second equilibrium at some point. However, predicting when it will occur is difficult.