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Dynamic Education Signaling with Dropout

  • Francesc Dilme

    ()

    (Department of Economics, University of Pennsylvania)

  • Fei Li

    ()

    (Department of Economics, University of Pennsylvania)

We present a dynamic signaling model where wasteful education takes place over several periods of time. Workers pay an education cost per unit of time and cannot commit to a fixed education length. Workers face an exogenous dropout risk before graduation. Since low-productivity workers' cost is high, pooling with early dropouts helps them to avoid a high education cost. In equilibrium, low-productivity workers choose to endogenously drop out over time, so the productivity of workers in college increases along the education process. We find that (1) wasteful education signals exist even when job offers are privately made and the length of the period is small, (2) the maximum education length is decreasing in the prior about a worker being highly productive, and (3) the joint dynamics of returns to education and the dropout rate are characterized, which is consistent with previous empirical evidence.

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File URL: http://economics.sas.upenn.edu/system/files/12-023.pdf
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Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 12-023.

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Length: 33 pages
Date of creation: 03 Jun 2012
Date of revision:
Handle: RePEc:pen:papers:12-023
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  1. Ben Lester & Braz Camargo, 2010. "Trading Dynamics in Decentralized Markets with Adverse Selection," 2010 Meeting Papers 488, Society for Economic Dynamics.
  2. Maarten C. W. Janssen & Santanu Roy, 2002. "Dynamic Trading in a Durable Good Market with Asymmetric Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 257-282, February.
  3. Heski Bar-Isaac, 2003. "Reputation and Survival: Learning in a Dynamic Signalling Model," Review of Economic Studies, Wiley Blackwell, vol. 70(2), pages 231-251, 04.
  4. Kremer, Ilan & Skrzypacz, Andrzej, 2007. "Dynamic signaling and market breakdown," Journal of Economic Theory, Elsevier, vol. 133(1), pages 58-82, March.
  5. Habermalz, Steffen, 2003. "Job Matching and the Returns to Educational Signals," IZA Discussion Papers 726, Institute for the Study of Labor (IZA).
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