Signaling Design

TL;DR

This paper analyzes how profit-seeking schools influence signaling in the job market, showing that monopolists capture surplus through low-information signals, while competition benefits students but increases effort wastefulness.

Contribution

It introduces a model with profit-seeking schools as intermediaries, revealing how their strategic signaling affects social surplus and effort in the job market.

Findings

Monopolist schools capture entire social surplus with low signals.

Competition shifts surplus to students and increases effort waste.

Efficient outcomes can be restored with fee caps or credit constraints.

Abstract

We revisit the classic job-market signaling model of \cite{spence1973job}, introducing profit-seeking schools as intermediaries that design the mapping from candidates' efforts to job-market signals. Each school commits to an attendance fee and a monitoring policy. We show that, in equilibrium, a monopolist school captures the entire social surplus by committing to low information signals and charging fees that extract students' surplus from being hired. In contrast, competition shifts surplus to students, with schools vying to attract high-ability students, enabling them to distinguish themselves from their lower-ability peers. However, this increased signal informativeness leads to more wasteful effort in equilibrium, contrasting with the usual argument that competition enhances social efficiency. This result may be reversed if schools face binding fee caps or students are credit-constrained.