What a signature costs
A spoken promise costs the same whether it is kept or not, so it cannot tell you which of the two you are looking at. Economics settled that in 1973, and in the same year it settled the other half:
separating equilibrium
Meaning
A market state exists when different types of actors take distinct actions to signal their true quality. By requiring a high-cost action that only high-quality actors can afford, a separating equilibrium is established, allowing buyers to identify reliable partners. This mechanism prevents low-quality actors from mimicking their superior counterparts.
Signaling Mechanism
High-cost actions like offering a long-term warranty or a personal guarantee are too risky for low-quality operators. Under a separating equilibrium, the creator who knows their work is sound can easily provide these assurances. This distinction allows the seller to command a premium price.
Credibility Cost
Paying for audits and legal reviews is the entry fee for proving value to a buyer. This separating equilibrium requires the founder to spend hours and capacity on verification rather than just making verbal promises. This hard proof is the only way to separate from competitors who rely on cheap talk, and the cost of this validation must be high enough that a fraudulent seller would lose money if they tried to copy the signal.
Market Filter
Unreliable actors exit the market when the cost of signaling exceeds their potential profit. The separating equilibrium protects the buyer from adverse selection by filtering out partners who cannot meet the verification standard. This boundary ensures that only high-performance operators remain in the transaction room.