The Theory of Honest Signalling

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Introduction: Part 1

Introduction: Part 2

The Basic Problem

The Basic Solution

Honest signalling in biology

Zahavi's handicap principle

Grafen's model

Attracting mates

Begging for food

Deterring predation

Contesting resources

Autumn color

Honest signalling in economics

Conspicuous consumption


The mathematics of honest signalling

Signalling as a game


Other resources

Carl T. Bergstrom

Using Mathematica

Contact Information

Department of Zoology
University of Washington
Box 351800
Seattle, WA 98195-1800

Honest signals in economics
From Veblen onward...

In the late nineteenth century, the economist and sociologist Thorstein Veblen coined the term "conspicuous consumption" to describe the ostentatious squandering of resources by the wealthy classes. How could he explain the economic behavior of these very wealthy segments of society, he wondered. What guided their choice of habits and customs? Why did they favor certain hard-to-produce but not-particularly-functional goods, such as lace? Why did they engage in extravagent displays of leisure?

In The Theory of the Leisure Class, Veblen suggested an organising principle which could be used to explain all of these things and more: The wealthy engage in conspicuous consumption in order to advertise their wealth.

Certain forms of public consumption make better advertisements, and thus are favored; similarly, wasteful displays of wealth may provide the most conspicuous (and hardest to fake) signals.

Seventy-five years later, economist Edward Miller explored the consequences of taxing the objects of conspicuous consuption. He identified two types of good for which the value to the purchaser comes more from the price paid than from the actual goods themselves: (1) so-called "status goods" such as expensive clothes or jewelery and (2) goods which "serve to show that the purchaser cared enough to spend what the good cost," such as flowers. He then argued that such goods are particularly appealing targets for taxation. Since much of the utility derived from these goods is a consequence of their price rather than their substance, high taxes on such goods serve to extract large revenue for the government while imposing a small burden on the consumer. He also argued that in societies which spend large amounts on status goods in a perpetual attempt to "keep up with the Joneses," taxation and expendature on public goods - even beyond what perfectly-honest citizens would choose (i.e., the Lindahl equilibrium)- can actually increase public welfare.

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Last modified September 4, 2002
Copyright © 2002 Carl T. Bergstrom