Signaling in economics involves transferring information between parties for mutual satisfaction. The party conveying information is the agent, and the receiver is the principal. Ethical reporting requires truthful information. Reporting is part of contract theory, aiming to balance rewards and skills for all parties.
The concept of signaling in the field of economics has to do with the transfer of information from one party to another, often in order to reach some sort of mutual satisfaction or agreement. When explaining how reporting occurs, the party conveying the information is often referred to as the agent. The party that receives and evaluates the information is generally understood to be the principal.
One of the classic illustrations of how referral works involves an individual looking for work. In order to get an employer’s attention, the prospective employee may choose to engage in reporting as a means of getting the employer’s attention. This segment of the process often begins with resume creation. If the information on the resume generates enough interest, the employer often schedules an interview and seeks to broaden their knowledge base about the prospective employee.
At the interview, the prospect assumes the role of agent and seeks to build on the rapport already established through the resume. This will involve emphasizing certain facts relevant to the position and overall objectives of the company. In essence, the agent is taking real data and presenting it in the most attractive way possible.
In turn, the employer assumes the role of principal and receives the information. When the information is received, the principals assimilate and evaluate the data. At the end of this process, the principal can extend a job offer to an agent, as well as inform the other agents that no further information is needed and the position is now filled.
One of the key components of ethical reporting is that only true and correct information is provided by an agent to a principal. While the agent may choose to downplay some data while highlighting other information that she believes is of more interest to the principal, honesty is essential if the transfer or signaling of information is to be considered successful.
Reporting is understood as part of a larger process that is often referred to as contract theory. Concerned with achieving a balance between rewards and skills employed in a process, signaling is very important in order to employ the theory of the contract to the benefit of all parties involved.
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