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General_Signaling_Screening

General_Signaling_Screening - Signaling and Screening in...

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