Does Signaling Solve the Lemon’s Problem?
Maybe. Lemon’s and signaling models generally deal with different welfare problems, the former with withdrawal of high quality sellers, and the latter with socially wasteful signals. However, with asymmetric information, high productivity workers may not (absent signaling) be employed where they are valued the most. If one’s productivity is known in alternative employment, signaling that overcomes the lemon’s problem at a cost will only occur if it increases welfare. If individual productivity is unknown in alternative employment, again signaling may occur and will overcome the lemon’s problem, but it may lower welfare. Key Words: Lemons, signaling, and sorting
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- In-Koo Cho & David M. Kreps, 1987.
"Signaling Games and Stable Equilibria,"
The Quarterly Journal of Economics,
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- Timothy Perri, 2011. "Spence Revisited: Signaling and the Allocation of Individuals to Jobs," Working Papers 11-16, Department of Economics, Appalachian State University.
- Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
- Walter Y. Oi, 1962. "Labor as a Quasi-Fixed Factor," Journal of Political Economy, University of Chicago Press, vol. 70, pages 538-538. Full references (including those not matched with items on IDEAS)
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