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## ← 23. Asymmetric information: silence, signaling and suffering education

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Showing Revision 1 created 07/06/2012 by Amara Bot.

1. Professor Ben Polak:
So today we're going to
2. study asymmetric information.
It's our last week,
3. and we're going to focus on
signaling today.
4. I'll spell it with one "L" here
as a concession to the
5. Americans.
So we're going to divide this
6. class into two parts.
And for the first part we're
7. going to focus on the case where
there is some verifiable
8. information in the problem.
So we'll see what this means in
9. a while, but let me just set up
an example and we'll see where
10. that takes us.
11. we know well by this stage,
which is the Cournot game.
12. So there's two firms,
and they're competing in
13. Cournot--so they're competing in
quantities--and we'll call the
14. firms A and B.
Suppose that Firm B has
15. costs--so to be more formal,
these are constant marginal
16. costs--equal to cM,
where M means middle or medium
17. or something.
Firm A also has costs but those
18. costs could come in one of three
types.
19. It could be that Firm A has
high costs, and high costs are
20. equal to middle costs,
plus a little bit.
21. It could be that Firm A also
has medium costs.
22. And it could be that Firm A has
low costs, and the low costs are
23. just the medium costs minus a
little bit.
24. Now, before this competition's
going to take place,
25. before they're actually going
to play the Cournot game,
26. Firm A has an opportunity.
Firm A's opportunity is to
27. reveal its costs to Firm B.
So to make this more explicit,
28. initially, Firm B obviously
knows his own costs and,
29. since there is only one type,
Firm A obviously knows those
30. costs as well.
So Firm A and Firm B know what
31. Firm B's costs are.
But initially,
32. although Firm A knows her own
costs, Firm B does not know Firm
33. A's costs.
So let's write that up.
34. So Firm B knows only its costs,
and Firm A knows both costs.
35. But the key decision we're
going to focus on is that Firm A
36. has an opportunity to reveal its
true costs to Firm B.
37. Now, it can do so in a
verifiable way.
38. For example,
it could hire an accountant.
39. That accountant from a
reputable outside firm could
40. come in and do the accounts for
Firm A and then publish them in
41. The Wall Street Journal or
something.
42. So Firm A can do that,
and let's assume it's costless
43. for it to do that.
So Firm A can costlessly and
44. verifiably reveal its costs to
B.
45. The question is:
this is going to happen before
46. they play Cournot.
The question is:
47. should Firm A reveal those
costs or not?
48. Should Firm A publicize or give
away its informational
to Firm B by telling Firm B
50. what its costs look like.
So what do people think?
51. Let me grab the mike and ask
people a little bit.
52. Imagine you're the manager of
Firm A.
53. Are you going to tell Firm B
what you're costs are or not?
54. Wave a hand in the air,
or should I just cold call
55. here?
Let me cold call,
56. so what's your name sir?
Student: Hugh.
57. Professor Ben Polak:
Hugh, and so suppose you're
58. the manager of Firm A,
would you reveal the
59. information or not?
Student: I would tell
60. them only if my costs were
lower.
61. Professor Ben Polak:
All right,
62. so Hugh says I would reveal the
information only if my costs
63. were lower.
Now why do you want to reveal
64. the costs if you have lower
costs?
65. Student: Because then my
firm will produce at a lower
66. cost so Firm B will produce less
because they know that we'll get
67. most of the market.
Professor Ben Polak:
68. Good.
It's Hugh, is that right?
69. Student: Yeah.
Professor Ben Polak:
70. So the point that Hugh is
making is there may be some
71. advantage in having the other
side know my costs if my costs
72. are low,
since that may induce the other
73. side to produce less.
Let's just fill out that
74. argument by putting in the
Cournot diagram.
75. So here's the Cournot diagram.
Here's the quantity for Firm A.
76. Here's the quantity for Firm B.
And here is the best response
77. or reaction curve for Firm B.
And in this picture there's
78. going to be three different
possible reaction curves for
79. Firm A, each one corresponding
to different costs.
80. So, for example,
this could be the reaction
81. curve or the best response for
Firm A in the case in which it's
82. medium.
But if it had lower costs what
83. would happen to that reaction
curve?
84. Would it shift in,
would it tilt,
85. what would happen to it?
Someone shout it out.
86. It would shift out.
If it had lower costs then it
87. would shift out so this would be
the best response for Firm A in
88. the low case,
and conversely,
89. this would be the best response
for Firm A in the high case.
90. So the point that Hugh is
making--or he should correct me
91. if this is unfairly paraphrasing
him--is if I have low costs then
92. I want the other side to know I
have low costs because that puts
93. us into the equilibrium in which
this is my best response curve
94. and this is the other side's
best response curve,
95. and Firm B ends up producing
less and ends up lowering its
96. production.
Is that right?
97. So the key idea here is that
this is a game--an idea we've
98. had often--this is a game of
strategic substitutes.
99. So if I have low costs,
I want the other side to know
100. that I have low costs because it
will cut back its production
101. which helps me.
On the other hand,
102. if I have high costs,
then I kind of like to remain
103. hidden.
I really don't want the other
104. side to know that I have high
costs, because if I have high
105. costs,
the other firm's actually going
106. to increase their production and
that's going to hurt me.
107. But notice I've twisted the
question a little bit.
108. The question I actually asked
you was: would you reveal the
And I flipped that around to a
110. slightly easier question which
is: what would I like the other
111. side to know?
Now what would I like the other
112. side to know?
I'd like the other side to know
113. if I have low costs.
I'd like the other side not to
114. know if I have high costs,
but that's not quite the
The question we asked was would
116. you, given whatever your costs
are, reveal that information to
117. the other side?
I think what Hugh has told us
118. is--so to say exactly what he
said--Hugh said if I had low
119. costs I'm going to reveal it to
the other side.
120. Is that right?
So, so far what do we know?
121. So far we know that if I have
low costs then I will reveal it.
122. So far we know that.
But what if I don't have low
123. costs?
What if I have middling costs
124. or high costs?
Well let's take these in turn,
What should I do if I have
126. middle level costs?
So somebody's got their hand
127. up, let me go and take advantage
of that.
Student: Alec.
129. Professor Ben Polak:
Shout it out so people can
130. hear.
Student: I think you
131. should still reveal because they
know if you had low costs you
132. would reveal,
and so if you had middle costs
133. and you didn't reveal then they
134. middle costs or high costs and
it's better for you to just
135. reveal that you had middle
costs.
136. Professor Ben Polak:
Good, did people hear that?
137. Let me just repeat that.
So you might think that if I
138. have middle costs,
you might think that I could
139. reveal or not reveal,
depending on what the other
140. side thought.
However, what Alec's arguing
141. correctly, is if I don't reveal
that I have middle costs,
142. the other side,
Firm B, knows that my costs are
143. not low.
So the only way they could
144. mistake me is they could think
I'm a high cost firm.
145. They know I'm not a low cost
firm.
146. How do they know I'm not a low
cost firm?
147. Because the low cost firm would
have revealed,
148. that was Hugh's argument.
So since low costs are firms
149. are revealing,
if I'm the middle cost firm,
150. if I don't reveal no one's in
any doubt I'm not a low cost
151. firm.
So all I could be is a middle
152. cost firm or a high cost firm.
All I could have is this
153. reaction curve,
which is the one I actually
154. have, or this reaction curve.
So if I don't reveal then the
155. other side might think that I
have high costs in which case
156. they're actually going to
increase their production and
157. hurt me.
So since the low cost firm is
158. going to reveal,
the medium cost wants to reveal
159. to ensure that no one thinks
it's high costs.
160. So low cost reveals and
therefore cM reveals as well to
161. prevent being mistaken for a
high cost firm.
162. Now there was a question,
let me come down and collect
163. the question.
Yeah?
164. Student: I was just
going to ask what if you have,
165. A reveals to both to the low
and middle class,
166. then they're obviously going to
know that he's a high cost,
167. which means that the concealing
doesn't do any good.
168. Professor Ben Polak:
Exactly,
Student: Bethany.
170. Professor Ben Polak:
So Bethany's pointing out
171. that once we know the low cost
type's going to reveal,
172. we know that the middle cost
type is also going to reveal so
173. as not to get mistaken for being
high cost,
174. which means,
if you're running a high cost
175. firm, it really doesn't matter
whether you reveal or not,
176. because you're going to be
revealed by the fact that you
177. didn't reveal.
Is that right?
178. Had you been low cost you would
have revealed.
179. Had you been middle cost you
would have revealed.
180. And therefore,
whether you choose to reveal or
181. not, everyone knows that you're
high cost.
182. So therefore, cH is revealed.
Everyone see that?
183. Okay, now notice that in this
argument we've just constructed
184. there were three types of firms
- high, middle,
185. low.
But I could have constructed
186. exactly the same argument,
albeit somewhat more tediously,
187. with a 100 types of firms.
188. lowest costs,
firms that had the 99th highest
189. costs, 98th highest costs,
97th highest costs and so on.
190. And this argument would have
been exactly the same.
191. At each stage the firm that's
left in the analysis who has the
192. lowest cost, will want to reveal
to distinguish itself from those
193. who haven't revealed "yet,"
and therefore we'll get
194. unraveling.
We'll get information to be
195. revealed, and notice
interestingly,
196. we'll get information to be
revealed beyond the medium.
197. So the 51st highest cost firm
will reveal, therefore the 50th
198. highest cost firm will reveal,
therefore the 49th and so on.
199. In fact, the only firm who
won't explicitly,
200. actively reveal themselves is
the firm who has absolutely the
201. highest cost.
And as Bethany points out,
202. they're going to be revealed
anyway.
203. So this is an idea--this idea
is called "informational
204. unraveling."
And again, in keeping for my
205. American audience,
I'm going to put one "l" in
206. unraveling.
Is that right,
207. there's one "l" in America
right?
208. Someone should just check that
209. I think that's correct.
What's the lesson here?
210. So one lesson is that this
happens.
211. We'll come back to that,
but another lesson,
212. perhaps a more important lesson
is: often the lack of
213. information,
the lack of somebody signaling
214. to you, the lack of somebody
trying to tell you something,
215. conveys information.
This was the point that Bethany
216. was making.
The fact that the high cost
217. firm doesn't in fact go out and
reveal information to you,
218. reveals something about what it
knows.
219. So Hugh's initial comment was
correct.
220. If I was the high cost firm I'd
like to remain hidden but I
221. can't remain hidden.
From your point of the view as
222. the receiver of the information,
there is information in the
223. lack of the attempt to convey
information.
224. So lesson: the lack of a
signal, the lack of an attempt
225. of a firm to signal you some
information, the lack of a
226. signal can be informative.
227. So this is an often forgotten
lesson.
228. It's a very simple idea,
but there's a natural tendency
229. when you're dealing with
information to focus on the
230. evidence that is there,
rather than the evidence that's
231. not there.
There's an expression that goes
232. with this.
The expression is "silence
233. speaks volumes."
You've all heard that
234. expression, silence speaks
volumes.
235. Let me give you one other
example.
236. So there's a Sherlock Holmes
story--by the way,
237. do you all know who Sherlock
Holmes is?
238. Good, so there's a Sherlock
Holmes story in which Sherlock
239. Holmes solves the murder.
He figures out who did the
240. murder.
And Dr.
241. Watson who's his sidekick is
trying to figure out how Holmes
242. could possibly have solved the
murder.
243. He says how did you solve the
murder?
244. Holmes says,
it's because of the barking
245. dog.
And Watson says,
246. what do you mean it's because
of the barking dog?
247. The dog didn't bark.
Holmes says,
248. that's exactly the point,
the fact that the dog didn't
249. bark, didn't make any sound
tells us who must have committed
250. the murder.
It's very easy to fall into the
251. trap of being Watson and to
ignore the thing that didn't
252. happen and focus on the things
that did happen.
253. Here, it's easy to forget that
actually the high cost firm is
254. revealed by doing nothing.
So this is the idea that
255. silence can speak volumes.
256. Every year I go back and try
and figure out what that
257. quotation is from and I can
never find it,
258. so anybody who finds it I will
give them a prize of some sort.
259. Originally I thought it must be
Shakespeare but it doesn't
260. appear to be.
So this is a little example
261. involving Cournot,
but I want to try and convince
262. you that this example is more
general.
263. Let's pick up the question;
264. Student: Isn't it
possible that there's an
265. equilibrium where the costs of
remaining hidden as a middle
266. cost firm outweighs the benefit.
Professor Ben Polak:
267. Not if we take the model
literally.
268. Not if we take the model in
Cournot literally because,
269. suppose Firm B doesn't know
whether you're high or middle,
270. then he's going to think your
costs are somewhere in between
271. and relative to your costs being
middle he's going to produce
272. more,
that's the point here.
273. Now it's true that in a richer
model there may be some other
hidden,
275. but that would have already
applied to the low cost firm.
276. Let me give you some other
examples and we'll see this in
277. other contexts,
and see that it might actually
278. ring true.
So one other example involves
279. resumes.
So this example requires some
280. explanation for the
non-Americans.
281. How many of you are
non-Americans here?
282. So one thing you need to know
as non-Americans is the way in
283. which people write resumes in
America.
284. Everyone know what a resume is?
A CV, a resume, right?
285. So when you look at a typical
resume from an American
286. student--if you're not American,
for those of you who aren't
287. American--how should I put this
politely?
288. It has a tendency to make you
want to vomit.
289. So that's basically the polite
version of what I was going to
So why does it have a tendency
291. to make you want to vomit?
Because Americans have a
292. tendency to put down everything
on their resume.
293. So if they were captain of the
294. and there they are now,
they're forty and applying for
295. a job, it still says I was
captain of the chess team in
And this is particularly true
297. when it comes to public service,
when it comes to sort of moral
298. acts.
So most people in Europe will
299. be a bit embarrassed about
writing their good deeds on
300. their resumes,
but Americans,
301. there's a little spot on their
resume which is about their good
302. deeds or their public service
and they put everything.
303. When I was eight I helped a
and there it is on their
305. resume.
So why is it that Americans
306. reveal so much information on
their resume?
unraveling, right?
308. So resumes are verifiable
information, it's hugely costly
309. to be caught cheating about your
resume.
310. So basically you're not going
311. And imagine if I'm admitting
students, let's say to law
312. school, to Yale Law School,
313. resume and in the spot where I'm
expecting to see public service
314. there's nothing written there.
What do I assume about that
315. student?
316. I assume that the person did
nothing.
317. This person has been a self
serving "evil git" their entire
318. life, has never even helped a
319. So people put down everything,
even these minimal things,
320. even these pretty shockingly
tiny acts of charity to reveal
321. themselves from those people who
did absolutely nothing,
322. that are basically the devil
incarnate.
323. So this is about resumes,
let's just take this a bit
324. further.
How many of you are from Los
325. Angeles?
So in Los Angeles I'm led to
326. believe, I'm told--you can
confirm this or not--there are
327. lots and lots of restaurants.
This is true, right?
328. Lots of restaurants and some of
these restaurants are good and
329. some of them are bad.
And, more to the point for
330. today's example,
some of these restaurants are
331. clean and some of them are not
so clean.
332. Is this true?
So it turns out that until the
333. late nineties,
the Los Angeles Municipality
334. rules,
local law, said that every
335. restaurant in Los Angeles
County, I think it was,
336. had to get visited by the
health inspector.
337. And the health inspector would
come around, I think it was
338. annually, and go to these
restaurants and they would issue
339. a certificate,
and this was a health
340. certificate and written on it
large letters--I think they were
341. red letters--was either A,
or B, or C.
342. There may even have been A- as
well, but for the purpose of the
343. story let's just call it A,
B, and C.
344. Now that was all the law said.
The law did not say that you
certificate anywhere.
346. So what does this model tell us
to expect about Los Angeles in
347. the mid-nineties?
Well if you're running a little
348. restaurant in Los Angeles and
you get an A health certificate
349. from the health inspector,
what are going to do with that
350. A certificate?
You're going to display it
351. prominently in the window,
right?
352. A health certificate.
So if you're running a slightly
353. less healthy restaurant,
maybe this is Ale's pizza chain
354. again,
and you still get a B
355. certificate from the Los Angeles
Health Inspector,
356. are you going to display it or
not?
357. You're going to display it
right, because why not?
358. We know the A's are going to
display.
359. These certificates are being
given to everybody,
360. so you're going to display even
a B certificate.
361. Now, I'm told,
from people who lived in Los
362. Angeles at the time,
that you could go around to the
363. greasiest spoon in Los Angeles
and look through these grease
364. smeared windows with the
cockroaches running all up and
365. down them,
and if you looked carefully
366. behind the cockroaches and the
grease you'd see a certificate
367. displayed that said C on it.
Presumably there was a D grade
368. as well: even the C's were
displaying.
369. So that's pretty dramatic
information unraveling.
370. Now, I'm exaggerating slightly
to make a separate point.
371. It turns out that in certain
areas of Los Angeles you'd
372. expect to see these health
certificates displayed,
373. even the C's,
and in other areas you wouldn't
374. expect to the see the C's
displayed.
375. Which areas would you expect
not to see people bothering
376. displaying their C or B-
certificate?
377. Any guesses?
The tourist areas.
378. Because for this story about
information unraveling to work,
379. the people who are the
380. need to know that you got the
certificates.
381. So if you're a tourist in Los
Angeles, you don't know this
382. system is in place,
and therefore if you're a C
383. certificate right next to
Disneyland or something,
384. whatever it is,
you can still make some
385. tourists ill,
without having to tell them
386. you're about to do so.
So that's a second example,
387. let me give a third example,
a little bit closer to home.
388. At the last curriculum reform
at Yale, there was a big debate
389. about what to do with Credit
D/Fail.
390. And one of the proposals for
Credit D/Fail was to allow
391. students to take courses Credit
D/Fail,
392. but if they ended up getting an
A or a B, they could display the
393. A or the B on their resume.
So they take a Credit D/Fail,
394. but if they got a grade like an
A or B, or an A- or whatever,
395. then they could opt in and have
it put on their resume.
396. What's wrong with that?
This is a serious proposal.
397. I was on this committee.
398. I didn't make the proposal but
399. What's wrong with this proposal?
What's wrong with the proposal?
400. What would displaying Credit on
401. It could come to mean C right,
it would come to mean C,
402. because all of the A's and the
B's would unravel that
403. information.
So if information is verifiable
404. and can be freely transmitted,
it has a way of coming out.
405. Let me give you one slightly
more serious example.
406. As you all know,
if you're arrested in the
407. U.S.--you should know this--you
have the right to remain silent.
408. I'm not saying you're all about
to get arrested,
409. but were you to be arrested,
you have the right to remain
410. silent.
That right was true in Britain
411. as well until recently,
when the government,
412. which isn't so big on civil
liberties, changed the rule
413. slightly.
So now you have the right to
414. remain silent in Britain,
but the Court has the right to
415. take into account as evidence if
you remain silent.
416. So what's that done to the
right to remain silent.
417. I'll leave it to you to figure
out what that's done to the
418. right to remain silent.
So this idea that information
419. unravels depended on certain key
parts and the most important
420. part was that the information
was verifiable.
421. It mattered that the
information was verifiable.
422. And to get full unraveling all
the way down,
423. in this case to the highest
cost firm,
424. you needed the people on the
receiving side of the
425. information to actually know
that that information was there.
426. So to get the full unraveling
you really need something like
427. common knowledge of the presence
of the information.
428. But often, the information that
you have--you have information,
429. you want to reveal that
information--but unfortunately
430. it's not so easily verifiable.
So what we're going to focus on
431. for the rest of today is
information that is not
432. verifiable.
that's pretty close to home.
434. A lot of you have been doing
job interviews recently.
435. How many of you have been going
out either doing interviews for
436. internships or jobs?
I know a lot of you are missing
437. class so I'm assuming charitably
that's what you were doing.
438. So when you go to these job
interviews you could imagine
439. that you're turning up for some
job interview,
440. let's say it's at Boring Bank
of Boston.
441. And you turn up at this
interview for Boring Bank of
442. Boston, and one of the things
that Boring Bank of Boston wants
443. to know is are you interested in
working for Boring Bank of
444. Boston.
That's a plus for them.
445. What they tend to do is they
446. More or less they say,
are you interested in working
447. for Boring Bank?
Now by the way,
448. if you are asked the question,
and you're interviewing for
449. Boring Bank,
450. by them are you interested in
working for Boring Bank,
451. what answer should you give?
452. How much information is there
in the fact that you answer yes?
453. None at all,
right, because clearly you want
454. the option of working for this
bank, so you're going to answer
455. yes anyway.
Now you may think this is just
456. a fictional example,
it's not.
457. I talked to some recruiters
from a bank in Boston that we'll
458. refer to as Boring Bank of
Boston not so long ago,
460. Yale undergraduates should do to
impress them.
461. And the recruiter,
who is a Yale graduate himself,
462. said to me that frankly Yale
463. these interviews than Harvard
464. I said, shattered and
disappointed--I said why,
465. and he said,
well when we asked them if
466. they're interested in working
for Boring Bank of Boston the
467. Yale guys say things like,
well I don't know it sounds
468. kind of boring.
The Harvard guys,
469. what do they do?
They show up with The Wall
470. Street Journal folded over
471. Boring Bank of Boston,
and sometimes they're wearing a
472. silly hat with I'm boring on it.
So I tried to persuade this guy
473. that despite this fact,
there's really no information
474. in the fact that the Harvard
guys are doing this,
475. and in fact you should hire the
Yale people because at least
476. they were honest,
and, hey, that might make the
477. bank less boring in the future.
This didn't work,
478. so I need to persuade you guys
to actually cough up and be
479. dishonest here.
There's a lesson here.
480. So one lesson is,
481. interviewer for a summer
internship or for a job later,
482. if you want to work for them,
483. It's one of the few questions
for which the answer is not
484. backward induction:
it's just yes.
485. There's a secondary lesson
here, which is,
486. if an interviewer for a bank is
asking you in the interview if
487. you'd like to work for them,
488. but you probably want to work
somewhere else.
489. If they're dumb enough to ask
you that question you probably
490. want to work for someone else.
But this is a real problem.
491. The problem is here you are.
You have some information you'd
492. like to convey.
Maybe you really are boring.
493. Maybe you really do want to
work for this bank.
494. You want to convey this
information, but it's hard for
495. you to persuade the employer
that this it is true because
496. anybody can say they want to
work for the bank.
497. More generally in life,
498. you want to work for a
particular bank or whatever it
499. happens to be,
it's also about whether you are
500. a good worker or not.
So let's try and think about
501. this in the context of not only
workers being boring or not,
502. but workers being good or not.
So we're going to look at a
503. costly signaling model.
It's going to turn out,
504. this model's going to be about
costly signaling,
505. and just for the purpose of the
model we're going to assume that
506. there are two kinds of workers
in America.
507. There are good workers,
we'll call them G,
508. and there are bad workers and
we'll call them B.
509. We'll assume that the
productivity of a good worker,
510. if you work for this firm,
is going to be 50 and we can
511. assume this is \$50,000 or
whatever but let's just forget
512. units for now and just call it
50.
their productivity is only 30.
514. So clearly, all other things
being equal, the employer would
515. rather employ a good worker than
516. All other things being equal is
important because then we have
517. to pay the good worker more.
Let's assume this is the U.S.
518. economy, so roughly 10% of the
economy are good workers and 90%
something like that,
520. and these are the proportions
in the U.S.
521. Let's also assume that firms
are competitive.
522. So firms are flooding into the
Yale Careers Office,
523. or the Yale Careers Fair,
and they're just desperately
524. trying to hire these workers.
There's competitive hiring
525. going on.
So firms compete for workers.
526. So they're going to pay 50 to a
worker they identify as good.
527. They pay 50 to a worker,
they the firms identify as
528. good.
And they're going to pay 30 to
529. workers they identify as bad.
If you're bothered by this
530. being exact, think of it as 50
minus a penny,
531. and 30 minus a penny.
It's not going to make any
532. difference to the analysis.
So if they can't identify a
533. worker, they think the worker's
just the average worker,
534. how much will the competitive
wage be?
535. What will be the competitive
wage of the average worker in
536. this economy?
It's not a hard math question.
537. Everyone's scratching their
538. So this is 50 x 10% and 30 x
90%, which averages out as?
539. 32% all right.
So they'll pay the average
540. which is 32 to a worker they
cannot identify.
541. Now, clearly in this model,
much like in the high cost
542. firms we started with,
the good workers would like to
543. be identified because they get
paid more.
544. The bad workers do not want to
be identified,
545. they'd rather remain hidden.
The problem here,
546. however, is there typically
isn't a verifiable piece of
547. information.
It's hard to verifiably
548. communicate to the other side
that you're a good worker.
549. So you guys are all good
workers right.
550. You wouldn't be here otherwise,
we hope.
551. So you show up to this firm,
this firm is looking for good
552. workers, and you could tell the
firm: "I'm a good worker."
553. In fact I'm betting most of you
have tried doing that in your
554. job interviews:
"I'm a good worker."
555. You could even do this in a
costly manner.
556. You could humiliate yourself by
jumping up on the table and
557. dancing on one leg while singing
some song about how you're a
558. good worker,
which would be humiliating but
559. it wouldn't in fact communicate
to the firm that you're a good
560. worker.
Why is it that you're dancing
561. this beautiful jig on the table
of the interview room,
562. singing this beautiful song
about how you're a good worker,
563. why doesn't that convince the
firm that you're a good worker?
564. Who's been in job interviews
recently?
565. Has anyone tried this?
Why is that not a successful
566. strategy?
Steven, is that right?
567. Student: Yes.
A bad worker could do that too.
568. Professor Ben Polak:
A bad worker could do that
569. too.
So it's true that it's costly
570. and humiliating to dance up on
the table on one leg and sing
571. you're a good worker,
but it's no more costly and
572. humiliating for you than it is
573. So if that worked,
a bad worker would do it too.
574. So merely a song and dance
isn't going to work.
575. It's going to be hard to signal
to the outside world that you're
576. a good worker.
That's going to be our starting
577. point.
578. So we need a way for good
workers to distinguish
We need a way for them to
580. signal, and what's key about
that signal is it has to be a
581. signal that they can make and a
582. or alternatively,
a signal that they will want to
583. make but a bad worker will not
want to make.
584. So dancing on the table doesn't
do it, and the reason it doesn't
585. do it is bad workers and good
workers are symmetric with
586. respect to the dishonor of
dancing on the table.
587. So we need a way for good
workers, you guys,
588. to distinguish yourself from
589. How in the American economy,
what's the main way in the
590. American economy in which good
workers signal the fact that
591. they're good,
that they manage to distinguish
592. themselves.
What's the main signal used in
593. the U.S.
economy?
594. Somebody?
Yes, education.
595. So the main signal in the U.S.,
not the only one by any means,
596. but the main signal is
education.
597. What's going to distinguish the
598. workers is the good workers are
going to have degrees,
599. more degrees,
better degrees,
600. more degrees,
whatever.
601. So what we're going to look at
today is a model some of you
602. have seen before but we'll do it
in a bit more detail perhaps.
603. It's a model due to a guy
called Spence,
604. Mike Spence,
who actually won the Nobel
605. Prize in large part for this
model.
606. The reason we know he won the
Nobel Prize in large part for
607. this model is he didn't write
practically anything else,
608. so it must have been for this
model.
609. So what we're going to do is
we're going to imagine that the
610. degree, the education that these
people are going to get,
611. that's going to distinguish
themselves and show that they're
612. good workers to the
employers--let's assume that the
613. employers once again are banks
or whatever--we're going to
614. assume that the extra piece of
education they're going to get
615. is an MBA.
Some of you out there are
616. getting an MBA.
Where's my MBA? There he is.
617. There's my MBA student up there.
So the good workers are going
618. to get an MBA,
and the way this is going to
619. work, it's going to work on the
costs of getting an MBA.
620. So to get to this to be a
successful signal,
621. to make this signal different
from merely dancing on the
622. table,
it's either got to be the case
623. that bad workers cannot get an
MBA or it's got to be the case
624. that it's so costly for bad
workers to get an MBA that they
625. won't bother.
So we're going to make the
626. difference in costs.
So we're going to suppose that
627. the cost per year of getting an
628. school, MBA education,
is 5 units if you're a good
629. worker.
We're going to assume that the
630. cost per year of going to SOM
and getting an MBA is a little
631. bit over 10, so 10 and a penny
632. So notice I've assumed in this
model that it's more costly per
633. year to get an MBA at Yale say,
if you're a bad worker than a
634. good worker.
Now, what are those costs?
635. What are the costs of getting
an MBA?
636. What's causing that cost
difference?
637. Well let's be clear what it
isn't.
638. It can't be the fees.
The fees are a large part of
639. the costs.
What are the fees of getting an
640. MBA at Yale this year?
Way too much right.
641. So the costs per year in terms
of fees are enormous,
642. but the fees themselves are not
going to do a good job of
643. distinguishing between good and
644. Why?
Because they're the same for
645. both parties.
We want something which is
646. differently costly,
so this is not the fees.
647. It can't be the fees.
They're the same for both
648. parties.
What other costs are there to
649. getting an education?
650. There's opportunity costs right.
All of you are economists--or
651. half of you are economics
majors--so the first thing that
652. should spring to mind is
opportunity costs.
653. But actually opportunity costs
don't help me here much because
654. if anything you'd think that the
opportunity costs of going and
655. getting an MBA at Yale are
higher if you're a good worker
656. than if you're a bad worker.
After all, if you're a good
657. worker you could stay home,
not get an MBA,
and, since you're such a good
659. worker, you'd have a high yield
in carrots or whatever.
660. Whereas, the bad workers will
not produce anything,
661. right?
So this is not really about
662. opportunity costs,
in fact, we'll assume that
663. they're zero.
664. We'll assume there are no
opportunity costs.
665. So what is it that's driving
this cost difference between the
666. good worker at SOM and the bad
worker at SOM?
667. Was that a potential answer out
there?
668. Student: Is it the
present value of future wages
669. for a good worker?
Professor Ben Polak:
670. Okay, so there we're thinking
671. No, let's just focus on the
cost side.
672. You're right there's going to
be different things going on in
673. the future, but let's focus on
the cost side.
674. I had you before so let's have
this guy.
675. Student: Mental effort.
Professor Ben Polak:
676. Mental effort,
right.
677. So where's my MBA student up
there.
678. Here he is--where is he,
up there.
679. It's pain and suffering,
is that right?
680. I can't see him yet.
He's nodding, good.
681. It's having--when you go to the
MBA class--of thinking my God,
682. thank goodness I escaped being
683. and you go back to the MBA
class and I'm there
684. again.
I'm assigning the same horrible
685. problem sets and you still can't
686. still got to deal with my
accent, right?
687. Good workers find it easier to
688. with my accent,
right?
689. So what it is?
It's the mental effort.
690. It's the pain and suffering.
It's the pain of the work.
691. The only thing that
distinguishes the costs of good
692. workers from bad workers in
education is it's so painful to
693. do the work.
If we went to a party school,
694. this wouldn't work.
That's why we can't just have
695. party schools.
We actually have to put you
696. through some pain in the
classroom.
697. I'm looking for some
confirmation from up there.
698. So the pain of the work is what
distinguishes these things.
699. Now I claim that we can have an
equilibrium in this society in
700. which there are good and bad
workers;
701. in which good workers cost per
year is less than bad workers
702. cost per year of getting,
in this case,
703. an MBA--we could do the same
704. let's focus on the MBA for now.
I claim there's an equilibrium
705. in this society,
there could be an equilibrium
706. in which getting an MBA takes
three years.
707. So I claim there is an
equilibrium here in which what
708. happens?
In which there are three year
709. degrees, degrees take three
years--a three year MBA sounds a
710. bit frightening but never
mind--in which the good workers
711. all get MBA's and the bad
workers do not.
712. But to tell you this is an
equilibrium I need to do a
713. little bit more,
so let me tell you one other
714. thing.
So I claim there's an
715. equilibrium in which the degrees
take three years,
716. all the good workers get MBA's,
all the bad workers do not get
717. MBA's, and what?
The employers identify MBA's as
718. good workers.
To make this work it has to
719. convince the employers.
So to make it work I need:
720. and the employers identify MBA
equals good, and not-MBA equals
So that's what I claim is an
722. equilibrium here and what I want
to do is I want us to show that
723. this actually is an equilibrium.
724. Now then, this is a slightly
different kind of equilibrium to
725. anything we've seen in the class
so far,
726. so I'm going to be a little
slow and nerdy about what we
727. need to check to check that this
indeed is an equilibrium.
728. So I'm going to leave some
space on the board and you
729. should leave some space too.
So my claim is this is an
730. equilibrium.
And we're doing guess and check.
731. I did the guess for you and
we'll do the check together.
732. To check, I claim,
I need to check two things.
733. One, I need to check that no
type will deviate.
734. So what do I mean by a type?
I mean types of worker.
735. Neither the good types of
workers would want to deviate
736. nor the bad types of worker
would want to deviate.
737. So this isn't new.
When we've checked equilibrium
738. we've always checked that people
don't want to deviate.
739. The only slight difference here
740. people won't want to
deviate I'm checking that
741. types of people won't
want to deviate,
742. but basically the idea is the
same.
743. Is that right?
The idea's the same,
744. so this is not really new.
The new thing is I also need to
745. check--actually I'll give myself
a bit more room here--I also
746. need to check that the
employer's beliefs are
747. consistent with the equilibrium
behavior.
748. So let's just stop and pause at
that a second.
749. We've never written down a
condition like this for
750. equilibrium, but here I have to.
Here there was asymmetric
751. information in the model.
And, in this equilibrium,
752. one important party to the
equilibrium, namely the guys who
753. are going to employ you,
that's pretty important right?
754. All they really have to do in
this model, of any importance,
755. is form an inference based on
756. They observe whether you get an
education or not and they
757. conclude whether or not you're a
758. So we're going to write down as
a condition of this being an
759. equilibrium that those
inferences "make sense."
760. By make sense I mean that
they're consistent with what
761. actually is happening in
equilibrium.
762. So before we get too nerdy
about that let's just think why
763. that's a sensible thing to
require.
764. Suppose, in fact,
suppose the world was like
765. this.
All good workers got MBA's,
766. all bad workers did not get
MBA's, and employers thought
767. that the people who got MBA's
were half good and half bad.
768. That just doesn't sound right,
right?
769. If in fact it's the case,
that it's the good workers who
770. are getting MBA's and the bad
workers who are not,
771. then the only belief that the
employers can have that's
772. consistent is the MBA's are in
fact the good workers and the
773. non-MBA's are the bad workers,
is that right?
774. So I'm not making any deep
point here, I'm just pointing
775. out that we need to make sure
that the beliefs that people
776. hold in this equilibrium are
consistent with what's actually
777. going on in the equilibrium.
But having said that,
778. there's no mystery here,
everything's fine.
779. In this particular claim of an
equilibrium, good workers are
780. the ones who got the MBA's;
bad workers are the ones who
781. didn't get the MBA's;
and the employers,
782. when they see an MBA,
indeed think they're good;
783. and, when they see a non-MBA,
784. So these beliefs are in fact
consistent with behavior,
785. so we're okay.
Okay, so I've had to check that
786. but it wasn't a big deal.
787. checking it?
I don't want people to hold
788. silly beliefs at equilibrium,
that's basically what I'm
789. saying.
All right, now let's go back
790. and check the sort of bread and
butter thing.
791. The bread and butter thing is
we need to check that no type of
792. worker is going to want to
deviate in this equilibrium.
793. So there's two types of worker.
There's good workers--and good
794. workers, what are they doing in
equilibrium?
795. What are the good workers doing
in equilibrium?
796. They're getting an MBA.
So the good workers,
797. they become MBA's,
and what are the good workers
798. identified as?
Once they got an MBA what does
799. the employer identify them as?
Good workers, right?
800. They're identified as good.
They get MBA's.
801. They're identified as good,
and their payoff is what?
802. What's the payoff of the good
workers here?
803. So they get paid 50 which is
their productivity,
804. but it costs them three years
of putting up with my homeworks.
805. So it costs them 3 x 5,
five for each year.
806. So 50 - 3 x 5 is what?
35, good.
807. So they get a total payoff of
35, and let me just pause a
808. second.
809. without telling you it,
so I'm going to say it.
810. Just to make the math simple
we'll assume that once you get
811. employed you work for a year and
812. That's a slightly morbid and
unpleasant assumption,
813. but otherwise we have to do
kind of present discounted value
814. of your whole future income and
then it turns into an accounting
815. class.
So we'll just assume that
816. everybody lives for one year.
If you want to do a more
817. complicated model then that's
fine, the idea will be the same.
818. So they get paid 50,
it's cost them 3 x 5,
819. and they get a total payoff of
35.
820. How about if they deviate?
If they deviate that means they
821. don't get MBA's.
So they're not MBA's.
822. They're identified as what?
If they don't get an MBA,
823. what are they identified as?
What does the employer think
824. the non-MBA's are?
825. So if they deviate then the
826. Even if they dance on the table
and say they're good,
828. And so their payoff is what?
What are they going to get paid?
829. They're going to get paid 30.
And sure enough 35 is bigger
830. than 30, so they're not going to
want to deviate.
831. So that's good news.
832. Let's check them.
833. in equilibrium,
they're not MBA's.
834. They don't get an MBA.
835. And they're paid what?
What are they paid these bad
836. workers?
Somebody?
837. They're paid 30.
They're paid their productivity.
838. So their payoff is just 30.
They didn't get an education so
839. it was free.
840. so their payoff is just 30.
If they deviate,
841. if the bad workers deviate,
then they get an MBA.
842. So here come the bad workers.
They find their way into my
843. class in SOM.
They have a miserable time.
844. (I have a miserable time
because they're having a
845. miserable time.) But at the end
of the day they're identified as
846. good workers and hence they're
paid 50.
847. And their payoff is 50 - 3 x
10.01 which is approximately 20.
848. Is that right?
So they don't want to deviate
849. either and now I'm done,
I've shown it's an equilibrium.
850. So just to recap.
To show that this was an
851. equilibrium, I had to show that
the good workers happily self
852. select into education and don't
want to deviate and skip
I have to show that the bad
854. workers self select into not
getting an education and don't
855. want to deviate and become
MBA's.
856. And I have to show that the
employers infer from this what
857. they should infer from this,
which was fine.
858. So I'm done.
This is indeed an equilibrium.
859. So notice, in this equilibrium,
the good workers do manage to
860. distinguish themselves from the
861. and they do end up getting paid
more (albeit at the cost that
862. they're going to die a year
later).
863. So this is called a separating
equilibrium--which I can never
864. spell.
I'm probably spelling this
865. wrong.
It's a separating equilibrium.
866. Why is it called a separating
equilibrium?
867. It's called a separating
equilibrium because the types
868. manage to separate and get
identified.
The good types manage to
870. separate and get identified,
871. they don't want to get
separated, but they do get
872. separated.
Now, how many of you have seen
873. some version of the Spence model
before?
874. Some of you,
let's go into this in a little
875. bit more detail to see if we've
really understood it.
876. So in particular could we get
away with a shorter degree?
877. Here we had people going to get
MBA's and it took them three
878. years each.
That seems an awful long time
879. to get an MBA.
So how about a one year MBA.
880. Some of you might think this is
a somewhat abstract example but
881. actually this is the kind of
thing you hear about all the
882. time.
If you listen to ads in the
883. education press you keep on
hearing schools,
884. perhaps schools who lack
Economics professors,
885. putting up the proposals for
one year MBA degrees.
886. I won't mention any schools by
name because I'll probably get
887. in trouble.
So how about a one year MBA?
888. Let's see if that will work.
And we'll allow good workers to
workers.
890. Let's assume that the costs per
year are the same as they were
891. before.
And let's suppose that this
892. candidate equilibrium,
this putative equilibrium,
893. involves the good workers
getting the MBA's;
894. the bad workers not getting an
MBA;
895. and the employers,
just as before,
896. identifying MBA's as good and
897. Question: is that an
equilibrium?
898. So who thinks yes?
Who thinks no?
899. So you can all tell my why then.
900. So why is that not an
equilibrium?
901. Somebody, anybody?
Student: Asman.
903. Professor Ben Polak:
Asman, so shout out.
would also benefit from doing
905. the MBA because their payoff is
still greater.
906. Professor Ben Polak:
Good, so what's wrong in this
907. equilibrium, it's not the
employer's beliefs.
908. If in fact people did follow
this behavior then employers
909. would be right to identify MBA's
with good.
910. It's also not the good workers
problem.
911. If in fact, employers are going
to pay more to MBA's,
912. then the good workers are even
more so going to want to go
The problem here--this is not
914. an equilibrium--and the problem
915. The bad workers' incentives are
wrong here.
916. Why?
Because if the bad workers do
917. what they're supposed to do in
this equilibrium--actually it
918. isn't an equilibrium,
but in this supposed
919. equilibrium--what they're
supposed to do is not get an MBA
920. and get a payoff of 30.
But if they went and got an
921. MBA, if they deviate and no one
else deviates,
922. just them deviating,
if they deviate they get an
923. MBA.
According to the equilibrium,
924. they're now identified as good
workers.
925. They're identified as good so
their payoff would be 50 minus
926. one year at approximately 10 for
a total payoff of 40.
927. But 40 is higher than 30 so
that's violated our equilibrium
928. condition.
Everyone see that?
929. So here the bad workers,
if it only took one year of
930. pain and suffering to get an
MBA, the bad workers would go
931. and get an MBA as well.
And that would be trouble
932. because now everyone gets an MBA
and its just like dancing on the
933. table again.
So how long must an MBA be?
934. In this model,
with this cost structure,
935. how many years must it take to
get an MBA?
936. Two years, right?
One year didn't work but you
937. can try at home and check that a
two year MBA will work.
938. Two years will be just enough
to put off the bad workers.
939. Leaving aside the numbers
though, what's the idea here?
940. The idea is that to work as a
successful signal,
941. the signal has to separate the
942. workers.
The workers have to choose to
943. be separated.
They have to self select into
944. being MBA's or not being MBA's,
and we need just enough pain
945. and suffering--and let's be
careful--just enough
946. difference in pain and
suffering for the workers to
947. select correctly.
So what we need,
948. we need enough difference in
cost for good workers to get the
949. degree and for bad workers not
to want to do so.
950. So one thing we could do is
have a two year degree.
951. If you absolutely insisted on
having a one year degree,
952. how could you create a
difference in cost that would
953. work?
Suppose you were employed to
954. advise some university out in
the west somewhere,
955. who wanted to have a one year
degree program.
956. What should you do in that one
year degree program to make it
957. work, to make it allow people to
separate?
958. Raising tuition isn't going to
work because that's the same for
You need a way to separate the
How are you going to do it?
961. You're going to make it really
hard.
962. If you want to have one year
degree program,
963. it's got to be really hard.
You've got to really jack up
964. the difference between the good
965. so you need to hire professors
966. Let's try and take a step back
from this model and see what
967. we've learned here.
Let's just try and draw some
968. lessons off this.
969. I want to draw two kinds of
lessons.
970. I want to draw lessons in
971. successful signal in society,
and then I want to draw lessons
973. nerdy lessons about Game Theory
if you like, and then I want to
974. want to talk about some more
975. education system.
976. So the key lesson here is the
lesson we just learned.
977. The key lesson is:
to be a successful signal,
978. to be able to separate types of
people, you need there to be
979. large differences in costs.
So the first lesson is a good
980. signal--it isn't that it has to
be costly--it has to be
981. differentially costly
across types.
982. The reason is you want the
types to self select,
983. so there better be differences
in costs.
984. Be a little bit careful here:
you could have differences in
985. benefits but we'll leave it as
cost for now.
986. That's one lesson.
987. Now what's that telling us in
this model?
988. That's telling us that if you
make it very,
989. very easy to obtain
qualifications in the U.S.
990. society, for example,
if you lower the standards that
991. you need to get a high school
degree and perhaps you lower the
992. standards to get a college
degree--I'm not saying that is
993. happening,
I don't want to take a
994. political position on this.
In England that's happening.
995. I can do that.
In England that seems to be
996. happening.
So you lower the standards it
997. takes to get a high school
certificate in England,
998. and then you perhaps lower the
standards to get a college
999. degree, what are you going to
see happen?
1000. You're going to see
qualification inflation.
1001. If you make it easy for
everybody to get the first
1002. degree, the good workers are
going to go on and have to get a
1003. second degree.
If you make it easy to get the
1004. second degree,
they're going to go on and get
1005. the third degree.
So what this model predicts is
1006. if you get rid of this cost
difference then workers will
1007. find a new way to raise the cost
difference again.
1008. The way that takes place,
at least in some economies,
1009. is you start seeing
qualification inflation.
1010. By qualification inflation I
mean that, pretty soon,
1011. even to drive a dump truck you
need to have a university
1012. degree.
Okay, now what are the lessons
1013. here for education more
generally?
1014. This is a pretty sparse model
of education but all of you,
1015. and more immediately me,
are involved in the education
1016. system.
So we should care about it a
1017. bit.
It's probably the most famous
1018. model of education.
As I say, it won somebody the
1019. Nobel Prize.
What is it telling us about
1020. education?
So the first thing I claim,
1021. I claim that this is a rather
pessimistic model of education.
1022. Why is this a pessimistic model
of education?
model?
1024. Let's talk about that a bit.
Anybody, some hands up?
1025. Some different hands?
Why is this a pessimistic model
1026. of education?
Way over there,
1027. a hand in another part of the
room, that will give the camera
1028. a work out anyway.
Student: You won't learn
1029. anything as a rule,
as that school has absolutely
1030. no value for education.
Professor Ben Polak:
1031. Good, so shout it into the
microphone, but that was right.
1032. Student: You don't learn
anything at school in this
1033. model.
Professor Ben Polak:
1034. Right, this is a model with no
learning.
1035. There's no learning in this
model.
1036. In fact, people in this model
go in with their productivities
1037. at 50 and 30 and they come out
with their productivities at 50
1038. and 30.
Nothing you do at school
1039. enriches you or makes you more
productive.
1040. That's a pretty pessimistic
lesson.
1041. Here we are in Lecture #23 or
something.
1042. And the message of this model
is, you guys haven't learned
1043. anything: you've just had a lot
of pain and suffering.
1044. So there's no learning in this
model.
1045. Now I hope that's not true as a
model of education.
1046. I hope it's not true that we
only have pain,
1047. but nevertheless,
let's pretend it's true at
1048. least for now and see where it
takes us.
1049. So a second observation of this
model, if we believe this model
1050. of education in which you don't
learn anything,
1051. education is just being used by
those people who are good anyway
1052. to separate from those people
1053. then education in this model is
socially wasteful.
1054. Why is education socially
wasteful in this model?
1055. In what sense is it socially
wasteful?
1056. Think of it from the point of
view of an economist?
1057. In this model,
the productivity of the workers
1058. doesn't change because of
education,
1059. but some resources were used by
the good workers to get an
1060. education.
At the end of the day,
1061. the good workers are better
off.
1062. The bad workers are worse off
and employers are the same as
1063. they would have been otherwise,
but that's just redistribution.
1064. There's no product from
education but resources were
1065. wasted in education.
Does that make sense?
1066. So in particular,
in our two year equilibrium,
1067. or in our three equilibrium,
it was the good workers who
1068. went to college,
or in this case went to
1069. business school and they wasted
three years at five a piece.
1070. So there's a waste of 15--a
waste of 10 in the two year
1071. model.
According to this model,
1072. education is socially wasteful.
How do we actually visualize
1073. that waste in society?
So let's take the model
1074. seriously, where is that waste
manifested in society?
1075. Where is that waste manifested?
So you guys aren't working,
1076. and where else is it
manifested?
1077. You guys sitting here is part
of the waste.
1078. You should be out doing
something else,
1079. and where else is the waste?
Me.
1080. You should take all your Yale
professors, stop using them as
1081. Yale professors and wasting
those resources,
1082. and have us go out and till the
fields or drive taxis or
1083. something.
So there's a social waste here
1084. and what we should do is,
according to this model,
1085. is we should send the
professors to drive taxis or
1086. dump trucks I guess.
I'm not claiming we'd be good
1087. at driving dump trucks.
1088. certainly in teaching classes
rather than driving dump trucks.
1089. But it turns out that,
in this model,
1090. teaching classes is completely
a waste of time,
1091. and therefore you're better off
using those resources to drive
1092. dump trucks.
Third, notice that in this
1093. model the result of education is
what?
1094. It's good for the good workers,
you guys managed to separate
1095. yourselves and get paid high
wages.
1096. That's nice for the Yale
1097. but who were the losers in this
model?
1098. Who were the losers?
1099. the 90% of workers in this
economy who aren't naturally
1100. gifted, who aren't going to find
education easy.
1101. They, in this model,
end up being paid 30.,
1102. Without the education system
how much would they have been
1103. paid?
32.
1104. So in this model education
increases inequality,
1105. and it doesn't increase
inequality in a benign way just
1106. by making the rich richer.
It increases inequality by
1107. making the poor poorer.
Education, in this model
1108. increases inequality.
In this model it actually hurts
1109. the poor.
Now, that strikes me as a
1110. pretty important lesson
actually.
1111. Again, I don't think we should
take this model too literally.
1112. In the real world,
I at least hope that some of
1113. you are learning something at
Yale.
1114. You're looking extremely
doubtful that you could possibly
1115. learn anything at Yale,
so maybe you're not,
1116. I don't know.
But, in the real world,
1117. I'd like to believe people are
learning here at Yale.
1118. But one of the things that's
going on in education in
one of the things is that you
1120. guys are separating yourselves
and signaling to employers that
1121. you're going to be good workers
for them.
1122. As a consequence,
that's great for you but
1123. someone else is being paid less.
This strikes me as an important
1124. lesson to hear in an election
year.
1125. In every election year in
America--I've been in a few
1126. election years in America
now--there are two things that
1127. all politicians agree on,
whether they're far right or
1128. far left.
All politicians agree on two
1129. things.
They agree that two things are
1130. good.
One: kissing babies.
1131. Two: they all want to be "the
education President," is that
1132. right?
All of them, is that right?
1133. Now, as a parent of some
babies, I'm not sure I want to
1134. have politicians' kissing babies
but that's for another day.
1135. The point here is what we're
learning--don't go yet
1136. guys--what we're learning here
is that if education hurts the
1137. poor maybe we shouldn't be so
keen to decide that we should
1138. subsidize the education sector
itself.
1139. Although, as an educator,
I hope you don't tell that to
1140. anybody.
What's the take away message of
1141. this model then?
The take away message is for
1142. education to work as a signaling
device, for education to
1143. generate a separating
equilibrium,
1144. some children have to be left
behind.
1145. We'll talk about that more on
Wednesday.