I will give an account of the basic of costly-signaling theory in the framework of a minimal game-theoretic model with 2 states of nature=types (“high” and “low”), 2 signals (presence and absence of a costly signal), and 2 reactions (“accept” and “do not accept”). We will, first, study how the equilibrium structure of such a game changes as a function of changes in two fundamental parameters: 1) the cost of the signal for each of the types, 2) the prior probability distribution over types.

Then, we will address the question of equilibrium selection, in such games, from both a “classical” reasoning and belief-based game-theoretic point of view, and by employing methods form evolutionary game theory. Applications are considered throughout the development. I will focus on education as a costly signal in the job market, advertising as a signal of product quality, dividend payments as a signal of a firm’s  fundamentals, and fashion (the wearing of certain outfits as well as the fashion industry).     

Understanding

•           the qualitative arguments of the theory of costly signaling,
•           the potential of game-theoretic methods to account for these propositions,
•          their historic development of how the theory has evolved in parallel with the game-theoretic methodological innovations

Attendance is mandatory, including:

• participation during the sessions
• presentation of solutions of problem sets
• discussion of papers and other participants’ presentation

•          the basic model will be developed step by step on the board
•          at each step of the development practical exercises (problem sets) will be suggested – to be prepared at home and compared in class or in group work in class
•           each student (individually or in groups of 2-3, depending on the number of participants)

Participation during the session (25%), presentation of paper (25%), and final oral exam (50%).

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Basic knowledge in game-theory and probability theory is helpful; (notably familiarity with conditional probabilities and Bayes’ law. Still, students participating regularly in the sessions and working on the problem set shall be able to follow the class. Indeed, the class can serve as a compact and high-level  introduction into the basic notions of game theory and as a means to understand conditional probabilities in an applied context.

During the weeks of the sessions: before and after class; for longer question, by appointment. 

Recommended preparatory reading:

Josef Hofbauer and Christina Pawlowitsch. 2025. The evolutionary dynamics of costly signaling. International Journal of Game Theory 54, Article 23. Published: June 3 2025.