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Education signaling, effort investments, and the market's expectations: Theory and experiment on China's higher education expansion

Zedong Hao and Yun Wang

China Economic Review, 2022, vol. 75, issue C

Abstract: China's higher education expansion has led to significant changes in younger generations' educational investments and labor market outcomes, and this trend is expected to continue due to the recent post-graduate education expansion in response to economic challenges posed by the COVID-19 pandemic. This paper investigates the impact of higher education expansion on labor market participants' choices, beliefs, and learning effects through an extended education signaling model, and uncovers the behavioral patterns in response to this policy change using a laboratory experiment. We find that subjects playing the role of workers generally follow a threshold strategy, and the changes in their effort investments and received wages after the enrollment expansion are consistent with the theoretical prediction. Using a hierarchical clustering method, we estimate different types of empirical strategies adopted by the subjects. In the low-enrollment treatment, the three types of empirical strategies are more distinct, and there is a strong tendency for effort over-investment by low-ability workers and under-investment by high-ability workers. In the high-enrollment treatment, the distinction between the estimated strategy types becomes much smaller. An analysis using elicited beliefs suggests that effort over-investment stems from workers' inconsistent beliefs regarding firms' wage offers — this inconsistency persists even in the last few periods of the game. Our findings provide a belief-based explanation for the discussion on over-education and are of great policy relevance.

Keywords: Job market signaling; Laboratory experiment; Beliefs; Higher education expansion; Post-graduate education expansion; COVID-19 pandemic (search for similar items in EconPapers)
JEL-codes: C91 D82 D83 D91 I26 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:chieco:v:75:y:2022:i:c:s1043951x22001067

DOI: 10.1016/j.chieco.2022.101848

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China Economic Review is currently edited by B.M. Fleisher, K. X. D. Huang, M.E. Lovely, Y. Wen, X. Zhang and X. Zhu

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