Signaling to Experts

We study competitive equilibria in a signaling economy with heterogeneously informed buyers. In terms of the classic Spence (1973) model of job market signaling, firms have access to direct but imperfect information about worker types, in addition to observing their education. Firms can be ranked according to the quality of their information, i.e. their expertise. In equilibrium, some high-type workers forgo signaling and are hired by better informed firms, which make positive profits. Workers’ education decisions and firms’ use of their expertise are strategic complements, allowing for multiple equilibria that can be Pareto ranked. We characterize wage dispersion and the extent of signaling as a function of the distribution of expertise among firms. Our model can also be applied to a variety of other signaling problems, including securitization, corporate financial structure, insurance markets, or dividend policy.

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