Suppose there are two types of persons, high ability and low ability. A particular diploma costs...

Suppose there are two types of persons, high ability and low ability. A particular diploma costs a high ability person $8,000 and costs a low ability person $20,000. Firms wish to use education as a screening device where they intend to pay $25,000 to workers without a diploma and $K to those with a diploma. In what range must K be to make this an e§ective screening device?

Consider a scenario where employers can perfectly observe job candidatesíability (information asymmetry does not exist in the labor market) and schooling is merely a signal. Under these assumptions, what would be the optimal level of schooling for low and high type (able) agents?

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Rahul Sunny answered 1 year ago

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