General_Signaling_Screening - Signaling and Screening in...

Signaling and Screening in Labor Market
Econ 210C
UCSB
April 25, 2011

Signaling
Types of Workers: high productivity
(
θ
h
)
and low productivity
(
θ
l
)
measured in units of output.
Cost of Education: C
(
e , θ
)
is twice continuously differentiable,
C
(
0, θ
) =
0, C
e
(
e , θ
) >
0, C
ee
(
e , θ
) >
0, C
θ
(
e , θ
) <
0, and
C
e θ
(
e , θ
) <
0.
Utility Function: u
(
w , e , θ
) =
w
-
C
(
e , θ
)
.
Reservation Wages: r ( θ
h
) = r ( θ
l
) = 0. What is the
competitive CE with information asymmetry and these
reservation wages?
Production Technology: All firms have the access to the same
CRS technology with labor as the only input. Firms are
pricing-taking and risk-neutral. The price of firms’ output is
normalized to be 1.
Econ 210C UCSB Paper

Signaling Quality by Education: (i) nature determines the type
of a worker according to prior: prob
(
type h
) =
θ
h
and
prob
(
type l
) =
θ
l
; (ii) knowing his own type, the worker
decides how much education to obtain; (iii) observing the
worker’s education level, firms simultaneously make wage offers
to the worker; (iv) the worker decides whether to accept a
firm’s offer.