Journal of Economics

, Volume 126, Issue 2, pp 135–151 | Cite as

Signaling and optimal sorting

  • Timothy PerriEmail author


I consider educational signaling of inherent ability that facilitates sorting of individuals between sectors. More able individuals are more productive in the primary sector, and less able individuals are more productive in the secondary sector. I find signaling may increase but never maximizes welfare, and is more likely to increase welfare the greater is productivity in the secondary sector, and, possibly, the lower is productivity in the primary sector. Consistent with recent increased undergraduate enrollment in the U.S, excessive signaling occurs by less able individuals. If education increases human capital, total welfare likely increases although more individuals may over-invest in education.


Signaling Sorting welfare 

JEL Classification




I wish to thank the editor, Giacomo Corneo, and two anonymous referees for comments on previous versions of this paper.


  1. Akerlof GA, Shiller RJ (2015) Phishing for phools: the economics of manipulation and deception. Princeton University Press, PrincetonCrossRefGoogle Scholar
  2. Akerlof, GA, Tong, H (2013) “Lemons with Naïveté.” Working paper, IMF, July 26Google Scholar
  3. Altonji JG, Pierret C (1998) Employer learning and the signaling value of education. In: Ohashi I, Tachibanaki T (eds) Internal labor markets, incentives, and employment. Macmillan Press Ltd., LondonGoogle Scholar
  4. Arcidiacono P, Bayer P, Hizmo A (2010) Beyond signaling and human capital: education and the revelation of ability. Am Econ J Appl Econ 2:76–104CrossRefGoogle Scholar
  5. Arteaga C (2016) Signaling vs. human capital: evidence from a reform in Colombia’s top university. Working paper, UCLA, FebruaryGoogle Scholar
  6. Arum, R, Roksa, J, Cho E (2011) Improving undergraduate learning: findings and policy recommendations from the SSRC-CLA Longitudinal Project. Social Science Research CouncilGoogle Scholar
  7. Becker GS (1993) Human capital, 3rd edn. University of Chicago Press, ChicagoCrossRefGoogle Scholar
  8. Becker GS, Hubbard WHJ, Murphy KM (2010) Explaining the worldwide boom in higher education of women. J Hum Cap 4:203–241CrossRefGoogle Scholar
  9. Bickhchandani S, Hirshleifer J, Riley JG (2013) The analytics of uncertainty and information, 2nd edn. Cambridge University Press, CambridgeCrossRefGoogle Scholar
  10. Bostwick V (2016) Signaling in higher education: the effect of access to elite colleges on choice of major. Econ Inq 54:1383–1401CrossRefGoogle Scholar
  11. Caplan B (2011) The magic of education. Library of Economics and Liberty (November 28, 2011). Accessed 4 June 2018
  12. Caplan B (2018) The case against education. Princeton University Press, PrincetonCrossRefGoogle Scholar
  13. Clark K (2014) The Philadelphia eagles personnel strategy: targeting college grads. Wall Street Journal (May 20, 2014). Accessed 4 June 2018
  14. Eble A, Hu F (2015) The importance of educational credentials: schooling decisions and returns in modern china. Working paper, Brown University, NovemberGoogle Scholar
  15. Habermalz S (2011) The speed of employer learning and job market signaling revisited. Appl Econ Lett 18:607–610CrossRefGoogle Scholar
  16. Hopkins E (2012) Job market signaling of relative position, or Becker married to Spence. J Eur Econ Assoc 10:290–322CrossRefGoogle Scholar
  17. Hoppe HC, Moldovanu B, Sela A (2009) The theory of assortative matching based on costly signals. Rev Econ Stud 76:253–281CrossRefGoogle Scholar
  18. Lange F (2007) The speed of employer learning. J Labor Econ 25:1–35CrossRefGoogle Scholar
  19. Lazear EP (1986) Salaries and piece rates. J Bus 59:405–431CrossRefGoogle Scholar
  20. Leonhardt D (2011) Even for cashiers, college pays off. New York Times (June 25, 2011). Accessed 4 June 2018
  21. O’Keefe B, Vedder R (2008) Griggs v. Duke power: implications for college credentialing. Working paper, Pope Center for Higher Education PolicyGoogle Scholar
  22. Perri TJ (1994) Testing for ability when job assignment is a signal. Labour Econ 1:365–381CrossRefGoogle Scholar
  23. Perri TJ (2016) Lemons and Loons. Rev Behav Econ 3(2):173–188CrossRefGoogle Scholar
  24. Perritt HH Jr (2008) 2008 Employment law update. Aspen Publishers, ChicagoGoogle Scholar
  25. Regev T (2012) Education signaling with uncertain returns. B.E. J Theor Econ Contrib 12(1):1–29Google Scholar
  26. Riley JG (1975) Competitive signalling. J Econ Theory 10:174–186CrossRefGoogle Scholar
  27. Riley JG (1979) Informational equilibrium. Econometrica 47:331–359CrossRefGoogle Scholar
  28. Riley JG (2001) Silver signals: twenty-five years of screening and signaling. J Econ Lit 39:432–478CrossRefGoogle Scholar
  29. Spence M (1974a) Market signaling. Harvard University Press, CambridgeGoogle Scholar
  30. Spence M (1974b) Competitive and optimal responses to signals: an analysis of efficiency and distribution. J Econ Theory 7:296–332CrossRefGoogle Scholar
  31. Spence M (2002) Signaling in retrospect and the informational structure of markets. Am Econ Rev 92:434–459CrossRefGoogle Scholar
  32. Stiglitz JE (1975) The theory of ‘screening’, education, and the distribution of income. Am Econ Rev 65:283–300Google Scholar
  33. The Region (1995) Minneapolis Federal Reserve Bank. Interview with Kenneth Arrow. Accessed 4 June 2018
  34. Waldman M (2016) The dual avenues of labor market signaling. Labour Econ 41:120–134CrossRefGoogle Scholar
  35. Weiss A (1983) A sorting-cum-learning model of education. J Polit Econ 91:420–442CrossRefGoogle Scholar
  36. Willis RJ (1986) Wage determinants: a survey and reinterpretation of human capital earnings functions. In: Ashenfelter O, Layard R (eds) Handbook of labor economics, vol 1. Elsevier, New YorkGoogle Scholar
  37. Wolpin KI (1977) Education and screening. Am Econ Rev 67:949–958Google Scholar

Copyright information

© Springer-Verlag GmbH Austria, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of EconomicsAppalachian State UniversityBooneUSA

Personalised recommendations