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.
LEE, Gea M. and YOO, Seung Han.
Endogenous quality choice, signaling, and welfare. (2016). 1-24. Research Collection School Of Economics.
Available at: http://ink.library.smu.edu.sg/soe_research/2083
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