Signaling versus Auditing

45 Pages Posted: 29 Oct 2019

See all articles by Helmut Bester

Helmut Bester

Free University of Berlin (FUB) - Division of Economics; Centre for Economic Policy Research (CEPR)

Matthias Lang

Ludwig Maximilian University of Munich (LMU); CESifo (Center for Economic Studies and Ifo Institute)

Li Jianpei

University of International Business and Economics (UIBE)

Date Written: August 1, 2019

Abstract

We analyze a competitive labor market in which workers signal their productivities through education à la Spence (1973), and firms have the option of auditing to learn workers’ productivities. Audits are costly and non–contractible. We characterize the trade–offs between signaling by workers and costly auditing by firms. Auditing is always associated with (partial) pooling of worker types, and education is used as a signal only if relatively few workers have low productivity. Our results feature new auditing patterns and explain empirical observations in labor economics like wage differentials and comparative statics of education choices. Our analysis applies also to other signaling problems, e.g., the financial structure of firms, warranties, and initial public offerings.

Keywords: signaling, information acquisition, auditing, wage differentials

JEL Classification: D820, D860

Suggested Citation

Bester, Helmut and Lang, Matthias and Jianpei, Li, Signaling versus Auditing (August 1, 2019). CESifo Working Paper Series No. 7183, Available at SSRN: https://ssrn.com/abstract=3254236 or http://dx.doi.org/10.2139/ssrn.3254236

Helmut Bester

Free University of Berlin (FUB) - Division of Economics ( email )

Boltzmannstr. 20
Berlin 14195, 14195
Germany
+49 30 838 55257 (Phone)
+49 30 838 54142 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Matthias Lang (Contact Author)

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Li Jianpei

University of International Business and Economics (UIBE) ( email )

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

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