MBA 217 - Berkeley Haas



MBA 211

The Value of Education Debrief

1. Let’s first turn to the strategies of workers. How much education should you get?

It depends on whether you’re a high type or a low type. You should get education if there’s a positive return to it. For MBA the cost to a high type is 80k while it’s 160k to a low type. Even if the low type captures all the increased surplus, it’s not worth doing. On the other hand, a BA is with doing for both types if they capture all the surplus. But this makes no sense for employers. If they see a BA, they cannot tell whether the type is low or high, so there’s at most 50k of surplus on the table.

2. What are market clearing prices in this market?

Suppose, as in round 3, that labor is scarce so wages will be bid up close to the surplus created by workers---100k in the grade school market, ? in BA, and 200k in the MBA market.

3. What advantage does an MBA convey?

It’s a costly signal to distinguish the worker types. Even though the firms know there’s no increased productivity from the education per se, they pay a premium for educated workers.

4. But isn’t the BA a more cost effective way to do the same thing?

Not credible as a signal. If employers pay, low types will “devalue” the degree.

5. Are the workers better off in this world for the presence of education? Or should education be banned?

Suppose there was only grade school. Then employers would bid up to 150k---the average productivity of a worker. Clearly, the low types are better off. What about the high types? They’re in effect subsidizing the low types by being paid less than their productivity. But it costs them 80k to “signal” their productivity credibly in this setting as against a 50k return. In other words, EVERYONE is worse off for the presence of education in this setting.

6. What other business examples can you give of this kind of perverse phenomenon?

Two-year analyst positions out of undergraduate school have this flavor. You have to work a zillion hours (unproductively often times) to signal that you are a “high type”, but this is wasteful for all involved and actually lowers productivity at times.

Celebrity endorsements---paying celebs to advertise a product is a costly and unproductive signal. Branding activities in general have this flavor

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