A Spillover-Based Theory of Credentialism

I propose a model in which credentials, such as diplomas, are intrinsically valuable; a situation described as credentialism. The model overcomes an important criticism of signalling models by mechanically tying a worker’s wages to their productivity. A worker’s productivity is influenced by the skills of their coworkers, where such skills arise from an ability-augmenting investment that is made prior to matching with coworkers. A worker’s credentials allow them to demonstrate their investment to the labor market, thereby allowing workers to match with high-skill coworkers in equilibrium. Despite the positive externality associated with a worker’s investment, I show how over-investment is pervasive in equilibrium.Credentialism; Matching; Spillovers; Signaling

Investing in skill and searching for coworkers: endogenous participation in a matching market

We demonstrate how search frictions have important yet subtle implications for participation in a skilled labor market by studying a model in which agents invest in skill prior to searching for coworkers. Search frictions induce the existence of acceptance-constrained equilibria, whereby matching concerns-as opposed to investment costs-dissuade the marginal agent from investing and participating in the skilled matching market. Such equilibria are robust, relevant, and have comparative static properties that contrast sharply with the intuitive properties arising in a benchmark static setting. We consider an extension with separate matching marketplaces, and show that our main results continue to hold

Pre-match investment with frictions

The paper explores an environment in which agents are motivated to make unproductive investments with the sole aim of improving their matching opportunities. In contrast to existing work, I add frictions by allowing the investment to be imperfectly observed. The analysis allows for a deeper understanding of the trade-off inherent in related models: investments waste resources but facilitates more efficient matching patterns. I show that greater frictions i) do not always lead to inferior matching patterns, and ii) can force the economy into to a Pareto preferred equilibrium.Matching Frictions Premarital investment Signaling

Trust and Vulnerability *

Abstract By facilitating mutually benecial transactions, trust is a crucial ingredient for economic development. We study a model in which agents rely on imperfectly enforceable contracts to support cooperation in a prisoners' dilemma production game. The model is used to explore the determinants of trust, as measured by the ex-ante probability with which an agent chooses the co-operative action, with a particular focus on vulnerability, as inversely measured by the payo when cheated. We show how a fundamental relationship between vulnerability and trust emerges when players observe private signals of the strength of contract enforceability, even in the limit as signal noise vanishes. In uncovering this relationship, the model demonstrates the importance of social institutions in the development process. We show stronger social institutions, by reducing vulnerability, increase equilibrium trust, promote the use of superior technologies, and interact with formal legal institutions

Cultivating Trust: Norms, Institutions and the Implications of Scale

We study the co-evolution of norms and institutions in order to better understand the conditions under which potential gains from new trading opportunities are realized. New trading opportunities are particularly vulnerable to opportunistic behavior and therefore tend to provide fertile ground for cheating. Cheating discourages production, raising equilibrium prices and therefore the return to cheating, thereby encouraging further cheating. However, such conditions also provide institutional designers with relatively high incentives to improve institutions. We show how an escape from the shadow of opportunism requires that institutional improvements out-pace the deterioration of norms. A key prediction from the model emerges: larger economies are more likely to evolve to steady states with strong honesty norms. This prediction is tested using a cross section of countries; population size is found to have a significant positive relationship with a measure of trust, even when controlling for standard determinants of trust and institutional quality.Trust, Institutions, Population Size