Unverifiable Education Quality under Labour Market Imperfection
thesisposted on 25.05.2018, 10:34 by Jingyi Mao
This thesis consists of three essays that are concerned with unverifiable education quality under labour market imperfection. In all three essays, we consider a labour market where the monopsonist firm is looking to hire skilled labour. Education/training is the only channel to obtain the skill. The firm faces two-dimensional information asymmetry: the exogenous innate ability (type), and the endogenous choice of quality of education. The contract offered by the firm contains a requirement of presenting a degree as proof of skill acquisition and the wage payment, which consists of a fixed rate and a bonus. The first essay studies the labour market inefficiency caused by the imperfect competition and the presence of fake degrees. Fake degrees add no value to the worker’s productivity, and they are the extreme form of low-quality education. We show that with imperfect competition, the firm makes full use of the fixed wage to extract more rents. As a result, some types are incentivized to buy fake degrees. Once we switch to Bertrand-type competition, the equilibrium contract requires the firms to set a zero fixed rate and give all surplus to the worker. Fake degrees cease to exist in equilibrium, and the distortion in production that was present under monopsony disappears. The second essay adds in-house training as an instrument for the firm’s rent-seeking in addition to the fixed wage. In-house training enables the firm to be assured of the skill acquisition of the worker, but the usage is restricted to its cost. When its cost is weakly less than the cost of a genuine degree, the firm offers only in-house training to extract the full surplus. As the cost of in-house training increases and becomes higher than the cost of a genuine degree, the firm faces a trade-off between using the costly in-house training and using the fixed wage which means giving up a certain rent to higher types. We find that when the cost of in-house training is less than a certain value, the firm prefers to have higher types presenting a degree and relatively lower types trained in-house. When the cost exceeds the certain value, the firm offers contracts such that no type has the incentive to get in-house training. The third essay extends the first essay by generalizing the low-quality education. Instead of having fake degrees, we consider two levels of education quality, high and low. Low-quality education adds a positive value to productivity but less than the value of high-quality education. We focus on the setting where the social optimum suggests higher types to choose high-quality education and middle types to choose the low-quality education. We find that the labour market imperfection and the information asymmetry cause more types choose no education and fewer types choose the high-quality education compared to the social optimum.