Coarse Information Leads to Less Effective Signaling

Abstract

This study considers firms’ coarse information about a worker’s possible types in Spence’s (1973) job market signaling model. Using incentive compatibility constraints appropriate to coarse information, we derive perfect Bayesian equilibria, which are refined into a unique equilibrium by invoking an extension of Cho and Kreps’ (1987) Intuitive Criterion. In the unique refined equilibrium, a high-type worker may acquire a higher education level with a lower wage than in Spence’s (1973) model. This implies that education signaling may be less effective signal when firms have coarse information about a worker’s possible types compared to that in Spence (1973). © 2018, Korean Econometric Society. All rights reserved.