In the Spence model of education signaling we studied, what was inefficient about the equilibria? Why did

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In the Spence model of education signaling we studied, what was inefficient about the equilibria? Why did the presence of asymmetric information (the fact that firms do not know the workers' productivities, but the workers themselves do) lead to this inefficiency? We saw that there were at least three possible equilibria that arose under certain conditions: a pooling equilibrium in which both types (high and low productivity) obtained an education, a pooling equilibrium in which neither type did, and a separating equilibrium in which only the high-productivity worker obtained an education. Are any of these equilibria more efficient than the others? Do workers enjoy having private information, or does your answer depend on the worker's type?

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In the Spence model of education signaling it is the presence of private information with the workers concerning their skills which cannot be observed by the employers that lead to inefficiency in the equilibrium This is inefficient equilibria because in order to give a signal each worker might be tempted to incur expenditure on education even though this expenditure might not raise the productivity of the workers Rather it will be a wasteful expenditure from the society point of view The pooling equilibrium wherein both the types of workersless and high productiveattains an education is more efficient It is efficient to the extent that it raises the wages of both types of workers which they receive on account of obtaining education even though the expenditure on education does not raises productivity but then productivity is not raised in any of the equilibrium Hence pooling equilibrium in which both types obtained an education is more efficient The answer depends upon the workers type If the worker ...View the full answer

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