Signaling takes place in markets with ________.
A) asymmetric information
B) positive externalities
C) negative externalities
D) a principal-agent problem

Question

Quizplus · Accepted Answer

Signaling takes place in markets with asymmetric information, where one party has more information than the other, which creates uncertainty and leads to adverse selection. Signaling allows one party to convey information about their characteristics to the other party in order to mitigate this uncertainty and reduce adverse selection. Positive and negative externalities are separate economic concepts that do not necessarily relate to asymmetric information and signaling. The principal-agent problem refers to conflicts of interest between a principal and an agent who is acting on the principal's behalf, which is a different issue than asymmetric information and signaling.

Signaling Takes Place in Markets with ________