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Education, signaling and the allocation of entrepreneurial skills


  • Arozamena, Leandro
  • Ruffo, Hernán


We assess the allocative importance of education when workers can choose to self-employ. To do so, we build a model combining educational choices with the labor market and selfemployment. Education can increase workers' human capital and may signal their ability as well. Both roles can be more important for working in a firm than for self-employment. We show that when education performs worse its signaling role, firms cannot distinguish high and low productivity workers, and there is a higher proportion of workers that allocate in less productive activities as self-employed. This option further reduces incentives to educate, given that education is less valuable for a worker if self-employed. Lowering the cost of education increases the number of educated workers, but does not solve the signaling problem, and could generate stronger misallocation.

Suggested Citation

  • Arozamena, Leandro & Ruffo, Hernán, 2017. "Education, signaling and the allocation of entrepreneurial skills," Research Department working papers 1102, CAF Development Bank Of Latinamerica.
  • Handle: RePEc:dbl:dblwop:1102

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    Cited by:

    1. Monserrat Serio & Pablo Mahnic, 2022. "Exploring the U-shaped relationship between education and entrepreneurial choice: a theoretical model and empirical findings for Latin America," SN Business & Economics, Springer, vol. 2(6), pages 1-22, June.

    More about this item


    Educación; Economía; Emprendimiento; Investigación socioeconómica; Productividad; Sector privado; Sector productivo; Trabajo y protección social; Habilidades y destrezas;
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