Worker productivity increases with education

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Reference no: EM133637294

Question

Consider the signalling model of Spence analyzed: The worker's productivity increases with education so that it is 2 + (e/4) for a high type worker with education e and is 1 + (e/4) for a low type worker with education e. The worker's cost of obtaining e is e/2 if he is of a high type while it is e if he is of a low type. The worker's outside option value is 1.6 for a high type and 0.6 for a low type. Answer the following questions assuming that the worker's type, which is high with probability lambda = (0,1/2), is private information. Describe the set of all separating equilibria when the education opportunity is present. Apply the Intuitive Criterion and identify the separating equilibrium that survives it.

Reference no: EM133637294

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