On the Efficiency of a Competitive Equilibrium with Education as a Screening Device.

by Velma Montoya Thompson, E. A. Thompson

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Develops an alternative to the models of Kenneth J. Arrow (1973) and A. Michael Spence (1973, 1974), models in which an employer uses education to identify (screen) pre-existing differences in abilities of prospective workers. This paper demonstrates that the Arrow-Spence conclusion--that competitive equilibrium amounts of education purchased by prospective workers exceed Pareto optimal amounts--fails once it is recognized that additional education may, through disappointing educational performance, lower an employer's opinion about the individual's innate ability to work. There is little reason to suppose that there is a systematic overvaluation of education by prospective workers. The amended Arrow-Spence model is completed by determining the identity of the employers, and it is demonstrated that there is always underinvestment in education in a competitive equilibrium in the amended, completed model. A test of the alternative models is presented using data from a sample of World War II veterans; it provides evidence for the superiority of the amended, completed model over the original Arrow-Spence model. 12 pp. Ref.

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