Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/244326 
Year of Publication: 
2021
Series/Report no.: 
Discussion Paper No. 286
Publisher: 
Ludwig-Maximilians-Universität München und Humboldt-Universität zu Berlin, Collaborative Research Center Transregio 190 - Rationality and Competition, München und Berlin
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 signal- ing problems, e.g., the financial structure of firms, warranties, and initial public offerings.
Subjects: 
Signaling
Information Acquisition
Auditing
Wage Differentials
WageDispersion
JEL: 
D82
D86
Document Type: 
Working Paper

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