Separating Equilibrium

A separating equilibrium is an equilibrium of a signaling game in which each type of sender chooses a distinct signal, allowing the receiver to infer the sender's private information with perfect accuracy. Separation is sustainable only when the cost of sending the signal differs sufficiently across types — low-quality senders must find mimicry prohibitively expensive. The separating equilibrium is the informationally efficient outcome of signaling games, but it is often Pareto-inferior to the full-information benchmark because the signaling costs are deadweight losses. The condition for existence of a separating equilibrium is a formalization of what economists call the single-crossing condition: the marginal cost of the signal must be monotonically ordered across types.

The separating equilibrium is usually treated as the 'good' outcome of a signaling game because it reveals information. But this confuses information revelation with welfare. A world in which everyone must get an expensive degree to prove they are competent is a separating equilibrium — and it is a world that wastes enormous resources on signals that have no productive value. Information efficiency and economic efficiency are not the same thing, and the signaling literature has not been honest enough about the difference.