Analysis and Simulation of Credential Competition

Abstract

In most advanced nations, educational background (i.e., credentials) has come to be all important. This report sketches a model of credential competition in Japan and shows the negative influences caused by credentialism. Individual workers’ traits, talents, and skills are not directly observable, so employers use credentials as one of the most important signals when screaning. In our model, workers with higher credential produce more output. Higher credentials result in higher wages, because of the added production and also the higher estimate of individual ability. This all provides incentives for workers to pretend their credentials are higher than they are in reality. Private returns for additional credentials then exceed the additional output. Furthermore, individual workers are spurred on by knowing that they share the output of workers of greater ability in a group of workers with higher credentials. In the model, there are four different classes of workers. The utility of workers of class n (U_n) depends upon the goods they consume (G) and the credential group to which they belong (E). The core of this simulation can be written:

$${{\text{U}}_{\text{n}}}\, = \,{\text{G }} - {\text{ E }} - {\text{ 3/8 }}{\left( {{\text{E}} - {\text{n}}} \right)^2}\,{\text{n}} = 1 \ldots 4$$

where 3/8 is the fraction representing the ordeal of moving to an upper credential group. The conclusion of this simulation is that everyone except workers of one class are working in a group higher than the optimum.