Harmful signaling in matching markets

Some labor markets have recently developed formal signaling mechanisms, e.g. the signaling for interviews in the job market for new Ph.D. economists. We evaluate the e¤ect of such mechanisms on two-sided matching markets by considering a game of incomplete information between …rms and workers. Workers have almost aligned preferences over …rms: each worker has “typical” commonly known preferences with probability close to one and “atypical”idiosyncratic preferences with the complementary probability close to zero. Firms have some commonly known preferences over workers. We show that the introduction of a signaling mechanism is harmful for this environment. Though signals transmit previously unavailable information, they also facilitate information asymmetry that leads to coordination failures. As a result, the introduction of a signaling mechanism lessens the expected number of matches when signals are informative. JEL classi…cation: C72, C78, D80, J44. Key words: signaling, cheaptalk, matching. Economics Department, Pennsylvania State University, 306 Kern Building, University Park, PA 16802, (email: [email protected]). I am especially grateful to Vijay Krishna and Marek Pycia for advising me during this project. This paper has bene…ted from suggestions made by Kalyan Chatterjee, Ed Green, Tymo…y Mylovanov, and Neil Wallace.