Signals solve the adverse selection problem

Question

Quizplus · Accepted Answer

Signals only solve the adverse selection problem if they are credible, meaning that they are viewed as a true reflection of the quality or attributes of the product or service being offered. Simply placing an advertisement in the New York Times or producing an expensive signal does not necessarily make it credible. The reputation of the signaling firm as a profit-maximizer may also affect the credibility of the signal, but it is not the only determinant.

Signals Solve the Adverse Selection Problem