Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 33

In the Spence model of education signaling we studied, what was inefficient about the equilibria? Why did the presence of asymmetric information(the fact that firms do not know the workers 'productivities, but the workers themselves do)lead to this inefficiency? We saw that there were at least three possible equilibria that arose under certain conditions: a pooling equilibrium in which both types (high and low productivity) obtained an education, a pooling equilibrium in which neither type did, and a separating equilibrium in which only the high-productivity worker obtained an education. Are any of these equilibria more efficient than the others? Do workers enjoy having private information, or does your answer depend on the worker's type?