Labor Market Signaling with Overconfident Workers
AbstractI extend Spence's (1974) labor market signaling model by assuming some workers are overconfident and some underconfident. Overconfident (underconfident) workers underestimate (overestimate) their marginal cost of acquiring education. Firms cannot observe workers' productive abilities and cannot observe workers' beliefs. However, firms know the fraction of overconfident, underconfident, and high-ability workers in the economy. I find that the presence of overconfident and/or underconfident workers in the labor market compresses wages. I show that workers' biased beliefs reduce welfare when workers are sufficiently different in terms of productivity and cost of education. Finally, I show that if the fraction of overconfident workers is relatively low and workers are sufficiently similar in terms of productivity and cost of education, then biased beliefs improve welfare.
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Bibliographic InfoPaper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 10.07.
Length: 24 pages
Date of creation: Jun 2010
Date of revision:
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More information through EDIRC
signaling; labor market; behavioral biases; wages; education;
Find related papers by JEL classification:
- D03 - Microeconomics - - General - - - Behavioral Microeconomics; Underlying Principles
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
- J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-10-16 (All new papers)
- NEP-CTA-2010-10-16 (Contract Theory & Applications)
- NEP-LAB-2010-10-16 (Labour Economics)
- NEP-NEU-2010-10-16 (Neuroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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