Higher education fees as signals

This paper argues that the fees paid for a degree may reveal private information about ability. In contrast with traditional signalling models, degrees need not be costlier for low-ability workers to acquire. This result follows when the labour market learns workers' types with delay, but only if their job requires high ability. Fees induce a separating equilibrium when they exceed the benefit of a low ability worker "passing" as high ability early in their career but are less than the life cycle penalty which high ability types would suffer. Raising fees in this setting exacerbates rather than ameliorates inefficient credentialing.