Spence’s pioneering essay from 1973 (based on his PhD thesis) deals with education as a signal of productivity on the labor market. A fundamental insight is that signaling cannot succeed unless the signaling cost differs sufficiently among the “senders”, i.e., job applicants. An employer cannot distinguish the more productive applicants from those who are less productive unless the former find it sufficiently less costly to acquire an education that the latter choose a lower level of education. Spence also pointed to the possibility of different “expectations-based” equilibria for education and wages, where e. g. men and white receive a higher wage than women and black with the same productivity.
Subsequent research contains numerous applications which extend this theory and confirm the importance of signaling on different markets. This covers phenomena such as costly advertising or far-reaching guarantees as signals of productivity, aggressive price cuts as signals of market strength, delaying tactics in wage offers as a signal of bargaining power, financing by debt rather than by issuing new shares as a signal of profitability, and recession-generating monetary policy as a signal of uncompromising commitment to reduce stubbornly high inflation.
https://www.nobelprize.org/prizes/economic-sciences/2001/popular-information/
Speaking of costly advertising…
So the next time you grit your teeth and wait out a long line of lal battis that pass you by at a busy traffic signal, understand that the security of the person involved isn’t the only point.
Making you (and everyone else) wait is the bigger point. That’s why chief guests like coming in late. That’s a feature for ’em, not a bug!
Consider this your periodic reminder to read The Elephant in the Brain:
The main thesis of the book is that we are very often not aware of our real reasons for most of our behaviors. Our behaviors are optimised for living in a social group and very often, from the point of view of natural selection, it is useful if we are not consciously aware of our real motivations.
The book is split into two sections. The first, entitled ‘Why We Hide Our Motives’ includes an introduction to the subjects of animal behaviour, signalling, social norms and self-deception.
https://en.wikipedia.org/wiki/The_Elephant_in_the_Brain
EconForEverybody 