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Unobserved Investment, Signaling, and Welfare

Author

Listed:
  • Gea M. Lee

    () (School of Economics, Singapore Management University, Singapore)

  • Seung Han Yoo

    () (Department of Economics, Korea University, Seoul, Republic of Korea)

Abstract

We consider a model in which each worker selects a public signal following a private investment on his quality type. Signaling then contributes to social welfare through its influence on the quality choice. We offer a rationale for the argument that there are too many high-type workers in separating equilibrium and the inefficiency can be reduced in pooling equilibrium. On the other hand, pooling equilibrium can generate too few high-type workers and the inefficiency is reduced in separating equilibrium.

Suggested Citation

  • Gea M. Lee & Seung Han Yoo, 2013. "Unobserved Investment, Signaling, and Welfare," Discussion Paper Series 1301, Institute of Economic Research, Korea University, revised 2017.
  • Handle: RePEc:iek:wpaper:1301
    as

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    File URL: http://econ.korea.ac.kr/~ri/WorkingPapers/w1301.pdf
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    References listed on IDEAS

    as
    1. Ian Walker & Yu Zhu, 2008. "The College Wage Premium and the Expansion of Higher Education in the UK," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(4), pages 695-709, December.
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    3. John H. Tyler & Richard J. Murnane & John B. Willett, 2000. "Estimating the Labor Market Signaling Value of the GED," The Quarterly Journal of Economics, Oxford University Press, vol. 115(2), pages 431-468.
    4. Kawai, Keiichi, 2014. "Dynamic market for lemons with endogenous quality choice by the seller," Games and Economic Behavior, Elsevier, vol. 84(C), pages 152-162.
    5. Benjamin E. Hermalin, 2013. "Unobserved investment, endogenous quality, and trade," RAND Journal of Economics, RAND Corporation, vol. 44(1), pages 33-55, March.
    6. Flavio Cunha & Fatih Karahan & Ilton Soares, 2011. "Returns to Skills and the College Premium," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 39-86, August.
    7. Riley, John G, 1979. "Testing the Educational Screening Hypothesis," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 227-252, October.
    8. Goldl├╝cke, Susanne & Schmitz, Patrick W., 2014. "Investments as signals of outside options," Journal of Economic Theory, Elsevier, vol. 150(C), pages 683-708.
    9. Hanming Fang, 2006. "Disentangling The College Wage Premium: Estimating A Model With Endogenous Education Choices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(4), pages 1151-1185, November.
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    11. Hanming Fang, 2001. "Social Culture and Economic Performance," American Economic Review, American Economic Association, vol. 91(4), pages 924-937, September.
    12. John G. Riley, 2001. "Silver Signals: Twenty-Five Years of Screening and Signaling," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 432-478, June.
    13. Wolpin, Kenneth I, 1977. "Education and Screening," American Economic Review, American Economic Association, vol. 67(5), pages 949-958, December.
    14. Daley, Brendan & Green, Brett, 2014. "Market signaling with grades," Journal of Economic Theory, Elsevier, vol. 151(C), pages 114-145.
    15. Michael Spence, 1973. "Job Market Signaling," The Quarterly Journal of Economics, Oxford University Press, vol. 87(3), pages 355-374.
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    More about this item

    Keywords

    Investment; Endogenous quality; Signaling; Welfare;

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • I21 - Health, Education, and Welfare - - Education - - - Analysis of Education
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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