Market Power and Separating Equilibrium in Job Market Signaling

Abhimanyu Khan

MPRA Paper from University Library of Munich, Germany

Abstract: The job market signaling model in Spence (1973) deals with a situation of asymmetric information. Workers vary in their productivity. A worker is privately informed of his productivity but the firms are not informed. Spence (1973) shows that in competitive markets, costly education may signal productivity -- workers of different productivities take up education to varying degrees, thereby resulting in a separating equilibrium where firms can infer a worker's productivity from his education choice. The importance of a separating equilibrium is that it resolves the informational asymmetry. In this paper, I enquire into the relationship between the firm's market power in the labour market (the market that is the source of asymmetric information) and the existence of separating equilibria. I show that a separating equilibrium exists, and therefore the informational asymmetry may be resolved, if and only if the market power of the firm in the labour market is not above a particular threshold.

Keywords: asymmetric information; signaling; separating equilibrium; monopsony; market power (search for similar items in EconPapers)
JEL-codes: D43 D82 (search for similar items in EconPapers)
Date: 2022-10-13
New Economics Papers: this item is included in nep-com and nep-mic
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https://mpra.ub.uni-muenchen.de/114974/1/MPRA_paper_114957.pdf revised version (application/pdf)

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