Signaling versus costly information acquisition

Helmut Bester, Matthias Lang and Jianpei Li

No 2018/11, Discussion Papers from Free University Berlin, School of Business & Economics

Abstract: In Spence's (1973) signaling by education model and in many of its extensions, firms can only infer workers' productivities from their education choices. In reality, firms also use sophisticated pre-employment auditing to learn workers' productivities. We characterize the trade-offs between signaling by workers and costly information acquisition by firms. Information acquisition 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 analysis applies also to other signaling problems, e.g. the financial structure of firms, warranties, and initial public offerings.

Keywords: Signaling; Information Acquisition; Auditing (search for similar items in EconPapers)
JEL-codes: D82 D86 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:fubsbe:201811

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