BEE Lab Meeting: Sherry Gao
4330 North Quad
BEE (Behavioral and Experimental Economics) Lab Seminar
Job market signaling: An experimental study of education degree as an imperfect signal
Inspired by the phenomenon of dropouts, this paper introduces the risk of dropout into Spence’s job market signaling model to explain the wage premium associated with academic degrees. I look at a labor market where the workers can pursue a degree with some cost, but may fail to meet the degree requirements and drop out involuntarily without the degree. Within this framework and assuming the dropout risk is higher for low-ability workers, I first relax the requirement on cost-difference in order to induce signaling behavior and explain the wage differential. Second, assuming workers have different risk attitudes, I propose a ``partially separating equilibrium'' in which the self-selection of workers into the education program depends both on their abilities and on their risk attitudes. Using lab experiments, I test these theoretical predictions with an focus on the effectiveness of Cho-Kreps intuitive criterion in equilibrium selection, and also elicit subjects' risk preferences to explain their strategies in the signaling games. Data show that separation in workers' educational choices is less complete when the pooling equilibrium cannot be refined by the criterion and when workers in the market are more risk averse.