Signaling versus Auditing

Helmut Bester, Matthias Lang and Jianpei Li
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Jianpei Li: University of International Business and Economics Beijing

No 286, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

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; wage dispersion (search for similar items in EconPapers)
JEL-codes: D82 D86 (search for similar items in EconPapers)
Date: 2021-10-17
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Signaling versus Auditing (2021)
Working Paper: Signaling versus Auditing (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:rco:dpaper:286

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