Testing Rational Hypotheses in Signaling Games

We introduce a solution concept for signaling games, called Rational Hypothesis Testing Equilibrium (HTE). Beliefs are updated via Ortoleva’s (2012) Hypothesis Testing model, allowing for conditioning on information sets off the path. Hypotheses are beliefs about rational strategies of the informed sender combined with prior information about types. For each message, the uninformed receiver selects a hypothesis in the maximum-likelihood fashion, and updates it via Bayes’ rule. Each Rational HTE is a Perfect Bayesian Equilibrium, but not vice versa. Rational HTE features a couple of desirable properties: First, beliefs are structurally consistent in the spirit of Kreps and Wilson (1982). Second, beliefs are consistent with mutual knowledge of rationality. We prove existence of a Rational HTE, and relate it with few prominent refinement criteria including the Intuitive Criterion and the strategic stability. Finally, we demonstrate that Rational HTE can account for the main experimental findings on behavior in signaling games