Endogenous quality choice, signaling, and welfare

• Main Authors: LEE, Gea M., YOO, Seung Han
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2016
• Subjects: Labor Economics
• Online Access: https://ink.library.smu.edu.sg/soe_research/2083; https://ink.library.smu.edu.sg/context/soe_research/article/3083/viewcontent/Lee.Yoo.12.2016.pdf
• Institution: Singapore Management University

We consider a model in which each worker endogenously selects his own type through aprivate investment decision and selects a public signal in the labor market. Signaling thencontributes to social welfare through its influence on the quality choice. We offer a rationalefor the argument that there are too many high-type workers from a welfare perspective,identifying circumstances under which separating equilibrium generates too many high-typeworkers while having to use the incentive-compatible signal and treat high-type workersdifferently in the market. The inefficiency can then be reduced in pooling equilibrium.