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TOO COOL FOR SCHOOL? SIGNALING AND COUNTERSIGNALING



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Claremont Colleges working papers in economics Claremont Graduate University Claremont Institute for Economic Policy Studies Claremont McKenna College Drucker Graduate School of Management Harvey Mudd College Lowe Institute Pitzer College Pomona College Scripps College TOO COOL FOR SCHOOL SIGNALING AND COUNTERSIGNALING NICK FELTOVICH RICK HARBAUGH AND TED TO Abstract In signaling environments ranging from consumption to education high quality senders often shun the standard signals that should separate them from lower quality senders We find that allowing for additional noisy information on sender quality permits equilibria where medium types signal to separate themselves from low types but high types then choose to not signal or countersignal High types not only save costs by relying on the additional information to stochastically separate them from low types but countersignaling itself is a signal of confidence which separates high types from medium types Experimental results confirm that subjects can learn to countersignal Journal of Economic Literature Classification Categories C72 D82 D83 Date March 2001 We thank Chris Avery Bruno Broseta William Hamilton Robin Hanson John Hardman Moore John Kagel Barry Nalebuff Al Roth Karl Schlag and seminar participants at various conferences and departments Harbaugh thanks the Yale School of Management for post doctoral support TOO COOL FOR SCHOOL 1 For Nash to deviate from convention is not as shocking as you might think They were all prima donnas If a mathematician was mediocre he had to toe the line and be conventional If he was good anything went Z Levinson from A Beautiful Mind Nasar 1998 p 144 1 Introduction Following in the tradition of Veblen s 1899 analysis of conspicuous consumption and Akerlof s 1970 model of adverse selection Spence s 1973a 1974 signaling model of overeducation showed how seemingly wasteful actions can be valued as evidence of unobservable quality Signaling models have since been applied to



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