Sander Heinsalu (University of Queensland)

“Spence meets Holmstrom: Luck and repetition in signalling”

Abstract

This paper studies repeated costly signalling when luck matters for the outcome. Benefit is obtained from the belief of the market, not directly from the effort or the signal. Nonstationary environments are allowed.
In the unique equilibrium in which effort is linear in type, the more the current cost of effort varies in type, the smaller the effort of the lowest types and the greater that of the highest. Intermediate types may raise their effort when their cost rises. Greater dependence of future costs on type reduces effort for all types. 
The framework easily extends to human capital accumulation, exogenous information revelation and multiple senders.