Dynamic Education Signaling with Dropout

Francesc Dilme and Fei Li ()
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Fei Li: Department of Economics, University of Pennsylvania

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: We present a dynamic signaling model where wasteful education takes place over several periods of time. Workers pay an education cost per unit of time and cannot commit to a fixed education length. Workers face an exogenous dropout risk before graduation. Since low-productivity workers' cost is high, pooling with early dropouts helps them to avoid a high education cost. In equilibrium, low-productivity workers choose to endogenously drop out over time, so the productivity of workers in college increases along the education process. We find that (1) wasteful education signals exist even when job offers are privately made and the length of the period is small, (2) the maximum education length is decreasing in the prior about a worker being highly productive, and (3) the joint dynamics of returns to education and the dropout rate are characterized, which is consistent with previous empirical evidence.

Keywords: Dynamic Education Signaling; Dropout (search for similar items in EconPapers)
JEL-codes: D83 J31 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2012-06-03
New Economics Papers: this item is included in nep-dge, nep-edu and nep-lab
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Citations: View citations in EconPapers (2)

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