ADEclass15_10-11_72 - Session #15 Outline: Selection:...

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Session #15 Outline: Selection: Signaling
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For next session: Problem set 4: Exercise 1: screening Readings: Besanko 476-497 . Groups working on segment 3: Proposals by Today! Deadlines: Assignment due: November 15 Presentations: November 17
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Review test 2 results: Bin Frequency Cumulative % 1 8 25,00% 2 1 28,13% 3,75% 3 5 43,75% 4 4 56,25% 5 6 75,00% 6 1 78,13% 7 0 78,13% 8 2 84,38% 9 2 90,63% 10 3 100,00%
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Good candidates willing to communicate the information that they are the ones the firm wants. Couldn’t they just communicate this information to employers? roblem: Selection: signaling Problem: If employers believed self-reported quality b “bad” candidates would also communicate that they are good! Self praise is not credible.
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How to communicate information credibly ? b signaling: the informed party (job candidate) takes an action that credibly signals its characteristics Selection: signaling We will focus on signaling in the job market through an example The insights from this analysis can be extended to many other contexts
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As an example, let’s look at an idealized labor market for investment analysts. Our market will be like the one described in Selection: signaling Problem Set 4, exercise 2, except that we’ll modify a couple of things.
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Job market signaling Two groups of candidates (investment analysts) with different productivities High ability (A) Value for the firm: 0 andidates 25% 40 € Low ability (B) Value for the firm: 20 € Candidates 75%
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Assumptions: Competitive labor market Many firms competing for fewer workers Job market signaling
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Suppose first that perfect information: b two different input markets b one price for each input Equilibrium wages? Job market signaling Recall: Many firms competing for fewer workers b wage = value produced for the firm w B = 20 € w A = 40€
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Job market signaling Asymmetric information Firms cannot tell the candidates apart there is only one market What would be the equilibrium wage w in this market? w = expected value produced for the firm w = (0.25*40 + 0.75*20) = 25 €
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Asymmetric information If w=25: w < 40 b good analysts paid “too little” w > 20 b firms would like to pay low-ability analysts less Good analysts would benefit if they could report their productivity Problem: if firms believed self-reports, bad analysts would say they are good as well. How to
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ADEclass15_10-11_72 - Session #15 Outline: Selection:...

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