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Signaling versus Auditing

Helmut Bester, Matthias Lang and Jianpei Li

No 7183, CESifo Working Paper Series from CESifo Group Munich

Abstract: We analyze a competitive labor market in which workers signal their productivities through education à la Spence (1973), and firms have the option of auditing to learn workers’ productivities. Audits are costly and non–contractible. We characterize the trade–offs between signaling by workers and costly auditing by firms. Auditing is always associated with (partial) pooling of worker types, and education is used as a signal only if relatively few workers have low productivity. Our results feature new auditing patterns and explain empirical observations in labor economics like wage differentials and comparative statics of education choices. Our analysis applies also to other signaling problems, e.g., the financial structure of firms, warranties, and initial public offerings.

Keywords: signaling; information acquisition; auditing; wage differentials (search for similar items in EconPapers)
JEL-codes: D82 D86 (search for similar items in EconPapers)
Date: 2018
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