A dynamic model of equilibrium selection in signaling markets

In his work on signaling, Spence proposed a dynamic model of a market in which a buyer revises prices in light of experience and in which sellers. with private information about their types, choose utility-maximizing signals given these prices. We follow Spence's suggestion of introducing perturbations into the resulting dynamic process. In a broad class of markets, our model selects a separating equilibrium outcome if and only if the equilibrium outcome satisfies a version of the undefeated equilibrium concept, whereas a pooling equilibrium outcome is selected if and only if the equilibrium outcome is both undefeated and satisfies D1. (C) 1997 Academic Press.