signaling theory

Signaling theory explains how individuals or organizations communicate certain qualities or intentions through specific actions, symbols, or behaviors that serve as signals to others. These signals help reduce uncertainty and establish trust, especially when information is costly or hard to verify. For example, a company’s investment in high-quality products signals reliability, or a job applicant’s credentials indicate competence. The key idea is that credible signals are costly or require effort, ensuring they genuinely reflect the underlying quality or intent, enabling informed decision-making and fostering mutual understanding.