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Signaling versus Auditing

Author

Listed:
  • Helmut Bester
  • Matthias Lang
  • Jianpei Li

Abstract

We analyze a competitive labor market in which workers signal their productivities through education à la Spence (1973), and firms have the option of auditing to learn workers’ productivities. Audits are costly and non–contractible. We characterize the trade–offs between signaling by workers and costly auditing by firms. Auditing is always associated with (partial) pooling of worker types, and education is used as a signal only if relatively few workers have low productivity. Our results feature new auditing patterns and explain empirical observations in labor economics like wage differentials and comparative statics of education choices. Our analysis applies also to other signaling problems, e.g., the financial structure of firms, warranties, and initial public offerings.

Suggested Citation

  • Helmut Bester & Matthias Lang & Jianpei Li, 2018. "Signaling versus Auditing," CESifo Working Paper Series 7183, CESifo.
  • Handle: RePEc:ces:ceswps:_7183
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    References listed on IDEAS

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    Cited by:

    1. Mehmet Ekmekci & Nenad Kos, 2020. "Signaling Covertly Acquired Information," Working Papers 658, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    2. Figueroa, Nicolás & Guadalupi, Carla, 2021. "Testing the sender: When signaling is not enough," Journal of Economic Theory, Elsevier, vol. 197(C).

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    More about this item

    Keywords

    signaling; information acquisition; auditing; wage differentials;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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