Consider Spence's job-market signaling model with the following specifications. There are two types of workers, 1 and 2. The productivities of the two, as functions of the level of education E, are
W1 (E) =E, W2 (E)= 1.5E
The costs of education for the two types, as functions of the level of education, are C1 (E)= E2 /2 and C2 (E)= E2 /3.
Each worker's utility equals his or her income minus the cost of education. Companies that seek to hire theses workers are perfectly competitive in the labor market.
(a) If types are public information (observable and verifiable), find expressions for the levels of education, incomes, and utilities of the two types of workers.
Now suppose each worker's type is his or her private information.
(B) Verify that if the contracts of part (a) are attempted in this situation of information asymmetry, then type 2 does not want to take up the contract intended for type 1, but type 1 does want to take up the contract intended for type 2, so "natural" seperation cannot prevail.
(C) If we leave the contract for type 1 as in part (a), what is the range of contracts (education- wage pairs) for type 2 that can achieve separation?
(d) Of the possibel separating contracts, which one do you expect to prevail? Give a verbal but not a formal explanation for your answer.
(E) Who gains or loses from the information asymmetry? How much?
Consider Spence's job-market signaling model with the following specifications. There are two types of workers, 1 and 2. The productivities of the two, as functions of the level of education E, are
W1 (E) =E, W2 (E)= 1.5E
The costs of education for the two types, as functions of the level of education, are C1 (E)= E2 /2 and C2 (E)= E2 /3.
Each worker's utility equals his or her income minus the cost of education. Companies that seek to hire theses workers are perfectly competitive in the labor market.
(a) If types are public information (observable and verifiable), find expressions for the levels of education, incomes, and utilities of the two types of workers.
Now suppose each worker's type is his or her private information.
(B) Verify that if the contracts of part (a) are attempted in this situation of information asymmetry, then type 2 does not want to take up the contract intended for type 1, but type 1 does want to take up the contract intended for type 2, so "natural" seperation cannot prevail.
(C) If we leave the contract for type 1 as in part (a), what is the range of contracts (education- wage pairs) for type 2 that can achieve separation?
(d) Of the possibel separating contracts, which one do you expect to prevail? Give a verbal but not a formal explanation for your answer.
(E) Who gains or loses from the information asymmetry? How much?
