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Asymmetric Information And Overeducation

Author Info

Listed author(s):
  • Mendolicchio Concetta

    ()

    (Institute for Employment Research - IAB)

  • Paolini Dimitri

    ()

    (Université Catholique de Louvain)

  • Pietra Tito

    ()

    (Università di Bologna)

Abstract

We consider an economy where production may use labor of two different skill levels. Workers are heterogeneous and, by investing in education, self-select into one of the two skills. Ex-ante, when firms choose their investments in physical capital, they do not know the level of human capital prevailing in the labor market they will be active in. We prove existence and constrained inefficiency of competitive equilibria, which are always characterized by overeducation. An increase in total expected surplus can be obtained by shrinking, at the margin, the set of workers investing in high skills. This can be implemented by imposing taxes on the cost of investing in high skills or by imposing a progressive labor earning tax.

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Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): 12 (2012)
Issue (Month): 1 (October)
Pages: 1-29

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Handle: RePEc:bpj:bejeap:v:12:y:2012:i:1:n:47
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Find related papers by JEL classification:
  • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
  • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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Cited by:

  1. Dauth, Wolfgang & Südekum, Jens, 2012. "Profiles of local growth and industrial change : facts and an explanation," IAB Discussion Paper 201220, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
  2. Mertens, Jean-François & Rubinchik, Anna, 2015. "Pareto Optimality Of The Golden Rule Equilibrium In An Overlapping Generations Model With Production And Transfers," Macroeconomic Dynamics, Cambridge University Press, vol. 19(08), pages 1780-1799, December.
  3. Mendolicchio, Concetta & Pietra, Tito, 2014. "On the efficiency properties of the Roy's model under asymmetric information," IAB Discussion Paper 201408, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
  4. DEIDDA, Luca G. & PAOLINI , Dimitri & ,, 2013. "Wage premia, education race, and supply of educated workers," CORE Discussion Papers 2013062, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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