Economic and psychological theories to cope with information asymmetries

We all live in a world of uncertainty and numerous decisions are made under asymmetrically distributed information. From an economic perspective, this situation can be partly overcome via signalling which is thought as a mean to reach a greater transparency and a separation of the market. For example, the seller of a specific product offers a warranty and thereby sends an observable signal which shall convince the customers of his reliability and trustworthiness. However, this mechanism only works when the receivers hold cognitive patterns to decode the signals as intended by the sender. In order to quickly categorise incoming information, the mental system memorises cognitive patterns in which similar features are grouped together and the branch of social or cognitive psychology speaks of stereotypes when those patterns are applied to human beings. The labour market traditionally represents a surrounding in which numerous signals are sent. The applicants try to prove their skills and abilities via educational levels, certificates etc. Of course, acquiring education in order to credibly transmit a certain status takes time and efforts and inevitably comes along with considerable transaction costs. Consequently, the applicant has to find the “optimal” level of education in order to close the informational gap on the one, but to avoid unnecessary transaction costs on the other hand. It can be shown that the economic strategy of signalling and the cognitive mechanism of stereotyping have numerous common features and lead to a great variety of potential market equilibria. With respect to the labour market, it becomes obvious that the degree of asymmetric information on the market is not only determined by the signal as such but also its cognitive processing. Often enough, a separation of the market is only requested when the amount of monetary transaction costs in order to reach this state and the cognitive efforts to identify single groups do not exceed a certain level. Moreover, it can be shown that the social benefits of being acknowledged as a high ability worker lead to economically unreasonable investments into education and a possible breakdown of seemingly stable equilibria. With respect to the single economic actors, individual signalling decisions may deviate from group behaviour and the danger of opportunistic behaviour carries the potential of missing an efficient market result. Via game-theoretical and other models, different market scenarios are discussed with the intent to close a further gap between economic and psychological assumptions.