HECER Discussion Paper No.13
PDF document: http://ethesis.helsinki.fi/julkaisut/eri/hecer/disc/13/overinve.pdf
Abstract: We consider Spence's (1973) idea of job market signalling in a matching model, where workers invest in education to accumulate human capital and to signal their privately known 'types'. As search frictions become infinitesimal, our model reproduces the 'Riley outcome'; i.e. each type, except the least able worker, overinvests in education. Otherwise, the bargaining wage induces underinvestment in education at least within a subset of types. Most notably, the 'minimum signalling profile' is not necessarily Pareto-dominant. If workers' innate types and education are sufficiently strong complements in terms of productivity, the model may exhibit multiple steady state equilibria.
JEL Classification: J24, J31, J41
Keywords: Education, signalling, search and matching.