Signaling
Taking a costly, observable action to credibly reveal hidden information about yourself.
What it means
A response to asymmetric information in which an informed party conveys unobservable quality or type through an action whose cost depends on that hidden trait. For a signal to be credible it must satisfy a single-crossing condition: it must be cheaper for high types than low types, so that imitation by low types does not pay and the signal separates them. Spence's labor-market model showed education can signal ability even if it adds no skill, simply because abler workers find it less costly to obtain. It matters across economics and biology as the general solution to the lemons problem and the logic behind credentials, warranties, dividends, and conspicuous display.
Examples
A firm offering a long warranty signals that it privately knows its product is reliable, since lemons would make the warranty too costly.
A peacock's absurd tail works as a signal precisely because it is a burden: only a bird healthy enough to survive dragging it about can afford to grow one.
A founder taking a token salary tells investors she expects to earn from the equity instead — a cheap gesture for someone confident in the company, an expensive one for someone who isn't.
First described in Michael Spence (1973).