Abstract
In his seminal paper “Spence (Q J Econ 87(3):355–374, 1973)” introduced a signalling model for the job market. In this model the employer (the principal) is not sure about the ability of the potential employee (the agent). Spence’s idea is that the education level of an applicant serves as a signal to indicate productivity level. The crucial assumption is that people with higher productivity incur lower costs (money, effort) of acquiring education than those with lower productivity. This leads to the fundamental insight that even if education did not contribute anything to work productivity, it can serve as a tool to separate high- from low-ability employees. In 2001, Michael Spence won the Nobel Prize in economic sciences, along with George A. Akerlof and Joseph E. Stiglitz, for their significant contribution on the analysis of markets with asymmetric information.
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Lindner, I. (2014). Signalling. In: Backhaus, J. (eds) Encyclopedia of Law and Economics. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-7883-6_439-1
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DOI: https://doi.org/10.1007/978-1-4614-7883-6_439-1
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