Bryan Caplan  

Overcoming Signaling

The Creation of Ritual Goods... Levitt Libertarians?...

Arnold makes a very interesting remark:

I think that it is difficult for an entrepreneur to compete in the signalling market, because it is hard to establish the credibility of your signalling mechanism.

I would go further. It is difficult for an entrepreneur to compete in the signaling market because cutting costs almost automatically degrades the quality of the signal. If you offer a quickie education, your graduates haven't suffered as much as graduates who served their time in full. In consequence, graduates of the quickie college look worse.

To really make the signaling value of a college education obsolete, an entrepreneur would have to figure out a credible way to show that "Even though this kid isn't going to college, even though he can afford it, he would have done well." It's a tall order.

I'd say entrepreneurs would be better advised to "position their products and services as rituals of affluence." It's not easy, but at least we know where to start.

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COMMENTS (10 to date)
brian writes:

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Matt writes:

What about all these certification exams: CPA, CFA, the 12 exams to become an actuary. This is somethign that is both cheap and is a good signalling mechanism. For instance, I am taking the CFA exam and the exam has been gaining so much in popularity that it is now considered on par or even more valuable than an MBA. Further, the pass rate is extremely low.

Problem is that they require an undergradute degree in something. So they obviously see value in college. Or maybe its just to protect the value of the degree

Katie writes:

I agree with Arnold when he says that a quickie degee looks worse than a full four year degree. Its hard for entrepreneurs to get any signaling value because it looks like they didnt have to do that much to get where they are at. Compared with a four year degree, entrepreneurs have to try extra hard to find a better way to show that they do care and that they have had to work hard to get where there at.

BimetallismBaby! writes:

I think there are market entrants working to undermine schools as the dominant signal provider. Take the CFA/FRM versus MBA. If you stroll through many financial service job boards many firms post "CFA or MBA (CFA preferred)".

The market process takes time but it is underway.

BimetallismBaby! writes:

*doh* scooped by matt.

Bill writes:

I'd be happy to burn my degree if:

1) Employers published reading lists for the preparation for employment at their firms.

2) Employers used testing and evaluation to determine competency.

Employers could have a "pre-test" to screen out those that would not be likely to succeed in (2).

Matt (#2) writes:

If you are admitting that an important part of the signal is a social signal, then there's no way for an entrepreneur to compete on price- When you're dealing with social cues of affluence, the price tag is an key part of the signal. With a signal to employers, you can compete on price, but with a social signal, the high price is essential- it has to be prohibitively costly to fake. If you're in it for social/networking effects, the reason for tuition, room & board, etc. totaling up to 40-50k/year is to ensure that you will only be hobnobbing with people willing to spend 40-50k/year on education.

An entrepreneur can't compete on both signaling effects. If he wanted to compete with the signaling effect to businesses, he could compete on price and perhaps length of time. An entrepreneur who wanted to compete with the social signaling effects cannot, since the money and the time are essential to the social signal. If you want to demonstrate the "even though he can afford it" factor, the only bulletproof way is to actually make him pay. To compete with the social signal, the only thing the entrepreneur can compete on is quality, i.e. implicitly admit "we know you're in college mostly for the social signal, but since you're going to college anyway, you'd might as well go here where you'll improve your human capital the most."

Matt (#2) writes:

oops.. sorry about the double post

[Duplicate removed.--Econlib Ed.]

Floccina writes:

The entrepreneur opportunity is in hiring capable people with fewer credentials for less money. Small companies sometimes do this.

meep writes:

FWIW, it's something like 9 exams to become an actuary... well, depending on how you count the exams. They keep changing the system. All I know is that =I= had/have to pass 9 exams. I took what I hope was my last one yesterday.

Once upon a time, it wasn't required to have a college degree to get any actuarial credentials, but I don't know if that's true any more. The signal of the actuarial exams is mainly specific to the insurance industry, though, but in the early years of the profession they are a very strong signalling mechanism. So strong that I've gotten some amazing raises over the past 4 years just from passing exams -- cumulatively 86% raises (about 17% per year). Here's a salary survey linked (from an actuarial recruiter).

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