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On-the-Job Signaling and Self-Confidence

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  • Francesco Squintani

Abstract

The labour economics literature on signalling assumes workers know their own abilities. Well-settled experimental evidence contradicts that assumption: in the absence of hard facts, subjects are on average overconfident. First we show that in any equilibrium of any signalling model, overconfidence cannot make players better off. In order to obtain more detailed predictions, we then introduce a specific on-the-job signalling model. We show that at fully-separating equilibrium, overconfident workers choose tasks that are too onerous, fail them, and, dejected by such a failure, settle down for a position inferior to their potential. Such a pattern leads to permanent underemployment of workers, and inefficiency of the economy. For the case of unbiased workers uncertain about their own value, we determine a necessary and sufficient condition for the existence of fully-separating equilibrium.

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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1274.

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Date of creation: Aug 1999
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Handle: RePEc:nwu:cmsems:1274

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  1. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
  2. Faruk Gul & Hugo Sonnenschein & Robert Wilson, 2010. "Foundations of Dynamic Monopoly and the Coase Conjecture," Levine's Working Paper Archive 232, David K. Levine.
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  4. Hyun Song Shin & Stephen Morris, 1997. "The rationality and efficacy of decisions under uncertainty and the value of an experiment (*)," Economic Theory, Springer, vol. 9(2), pages 309-324.
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  6. Mortensen, D.T., 1998. "Equilibrium Unemployment with Wage Posting: Burdett-Mortensen Meet Pissarides," Papers 98-14, Centre for Labour Market and Social Research, Danmark-.
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  8. Harsanyi, John C., 1994. "Games with Incomplete Information," Nobel Prize in Economics documents 1994-1, Nobel Prize Committee.
  9. Kohn, Meir G. & Shavell, Steven, 1974. "The theory of search," Journal of Economic Theory, Elsevier, vol. 9(2), pages 93-123, October.
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  11. Bengt Holmstrom & Roger B. Myerson, 1981. "Efficient and Durable Decision Rules with Incomplete Information," Discussion Papers 495, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  12. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August.
  13. Andrew Weiss, 1995. "Human Capital vs. Signalling Explanations of Wages," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 133-154, Fall.
  14. A. Michael Spence, 1977. "Entry, Capacity, Investment and Oligopolistic Pricing," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 534-544, Autumn.
  15. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-90, October.
  16. Ausubel, Lawrence M & Deneckere, Raymond J, 1992. "Bargaining and the Right to Remain Silent," Econometrica, Econometric Society, vol. 60(3), pages 597-625, May.
  17. Salop, Joanne & Salop, Steven, 1976. "Self-Selection and Turnover in the Labor Market," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 619-27, November.
  18. John G. Riley, 1974. "Competitive Signalling," UCLA Economics Working Papers 050, UCLA Department of Economics.
  19. Faruk Gul, 1998. "A Comment on Aumann's Bayesian View," Econometrica, Econometric Society, vol. 66(4), pages 923-928, July.
  20. Noldeke, Georg & van Damme, Eric, 1990. "Signalling in a Dynamic Labour Market," Review of Economic Studies, Wiley Blackwell, vol. 57(1), pages 1-23, January.
  21. Robert J. Aumann, 1998. "Common Priors: A Reply to Gul," Econometrica, Econometric Society, vol. 66(4), pages 929-938, July.
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Cited by:
  1. Konrad, Kai Andreas & Spadaro, Amedeo, 2005. "Education, redistributive taxation and confidence," Discussion Papers, Research Unit: Market Processes and Governance SP II 2005-05, Social Science Research Center Berlin (WZB).
  2. Lu�s Santos-Pinto, 2012. "Labor Market Signaling and Self-Confidence: Wage Compression and the Gender Pay Gap," Journal of Labor Economics, University of Chicago Press, vol. 30(4), pages 873 - 914.

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