A spillover-based theory of credentialism

Chris Bidner

Canadian Journal of Economics, 2014, vol. 47, issue 4, 1387-1425

Abstract: I propose a model in which credentials, such as diplomas, are instrumentally valuable to workers. The model avoids an important criticism of standard job market signalling models by tying a worker's wage to their output. A worker's productivity is influenced by the skills of their coworkers, where such skills arise from an abilityaugmenting investment that is made prior to matching with coworkers. Credentials allow workers to demonstrate their investment to the labour market, thereby allowing them to match with highskill coworkers in equilibrium. Despite the positive externality associated with a worker's investment, I show how overinvestment is pervasive in equilibrium.

Date: 2014
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