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Market Signaling

Formalized by the economist A. Michael Spence, market signaling theory explains how actors make joint decisions in the presence of information asymmetries. Signaling theory originally developed to better understand how employers choose employees when the abilities of employees are unknown to the employer and hiring is a costly investment for an organization. Employers value potential employees based on the perceived, yet unknown, value of the potential employee to the organization. Potential employees who could withstand the rigors of education are assumed to be more productive than those with less education; thus, potential employees may use their education as a signal to an employer of their higher potential ability. Alternatively, organizations may screen potential employees by requiring a minimum level of education, essentially restricting the hiring ...

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