Search results

AbstractWe analyze a competitive labor market in which workers signal their productivities through education, and firms have the option of auditing to learn workers' productivities. Audits are costly and non‐contractible. We characterize the trade‐offs between signaling by workers and costly auditing by firms. Auditing is always associated with (partial) pooling of worker types, and education is used as a signal only if relatively few workers have low productivity. Our results feature new auditing patterns and explain empirical observations in labor economics like wage differentials and comparative statics of education choices. Our analysis applies also to other signaling problems, for example, the financial structure of firms, warranties, and initial public offerings.

AbstractWe analyze welfare under differential versus uniform pricing across oligopoly markets that differ in costs of service, and establish general demand conditions for differential pricing by symmetric firms to increase consumer surplus, profit, and total welfare. The analysis reveals why competitive differential pricing is generally beneficial—more than price discrimination—but not always, including why profit may fall, unlike for monopoly. The presence of more competitors tends to enlarge consumers' share of the gain from differential pricing, though profits often still rise. When firms have asymmetric costs, however, profit or consumer surplus can fall even with 'simple' linear demands.

We analyze incentive problems in team and partnership structures where the only available information to condition a contract on is a partial and noisy ranking which specifies who comes first in efforts among the competing partners. This enables us to ensure both first‐best efficient effort levels for all partners and the redistribution of output only among partners. Our efficiency result is obtained for a wide range of cost and production functions.