Signaling
Plain definition
Signaling is when the better-informed party takes a costly action to credibly reveal their quality — for example, earning a degree to signal ability to employers.
In economics
Spence's model shows signaling works only if the signal is cheaper for high-quality types to obtain, so low-quality types cannot profitably imitate it. Warranties, brand advertising, and education are classic signals.
Example
A startup offering a long, generous warranty signals that its product is reliable, because a shoddy producer could not afford to make that offer.
Common confusion
Signaling is the informed side revealing itself; screening is the uninformed side designing tests to extract information — the direction of the initiative differs.