Laughter and humor often co-occur in social interaction, but their functional relationship is widely debated, and not well understood. The encryption theory of humor (Flamson and Barrett 2008) proposes that intentionally produced humor honestly signals the fact that speaker and audience share information, enabling the assessment of relative similarity and social assortment for compatibility over time. Drawing on relevance theory (Sperber and Wilson 1995) and other forms of post-Gricean pragmatics, humorous utterances and acts are considered encrypted in the sense that what makes them funny is not merely their surface content, but a relationship between the surface content and implied meaning understood by both the speaker and the audience. This theory provides a novel explanation of both the functions and the structure of humor, accounting for many of the characteristic features of humor production including its obliqueness, its subjectivity, and its variation both within and between cultures. While the ultimate function of this system is proposed to be social assortment, the proximate mechanism is seen as exploitable for any number of communicative acts. In addition, many existing accounts of the mechanics of humor production and appreciation are consistent with the encryption model. Laughter is a vocal signal closely related to humor, and can serve to communicate a wide range of intentions. The acoustic forms of laughter signals are intimately related to their particular communicative functions, and these functions can often be understood with reference to how humor is strategically used in any given communicative context. This paper will explore how the encryption theory of humor can illuminate our understanding of laughter, as well as the interaction between paralinguistic phenomena and the complexities of indirect communicative strategies more broadly. Making references to other models of humor, this paper offers a theoretical review of the new proposal, based on experimental research findings.