On-the-Job Signalling and Self-Con ̄dence

The labour economics literature on signalling assumes workers know their own abilities. Well-settled experimental evidence contradicts that assumption: in the absence of hard facts, subjects are on average overcon ̄dent. First we show that in any equilibrium of any signalling model, overcon ̄dence cannot make players better o®. In order to obtain more detailed predictions, we then introduce a speci ̄c on-the-job signalling model. We show that at fully-separating equilibrium, overcon ̄dent workers choose tasks that are too onerous, fail them, and, dejected by such a failure, settle down for a position inferior to their potential. Such a pattern leads to permanent underemployment of workers, and ine±ciency of the economy. For the case of unbiased workers uncertain about their own value, we determine a necessary and su±cient condition for the existence of fully-separating equilibrium JEL CLASSIFICATION: J31, D82, D83 ¤The ideas for this paper originated with the attendance to the 1996 Berkeley Russel-Sage Foundation Summer Camp on Behavioural Economics. I would like to thank all the participants, and especially the organisers: Colin Camerer, Danny Kahneman, Matt Rabin and Dick Thaler. I would like to deeply thank Eddie Dekel, Zvika Neeman, Dale Mortensen, Juuso Valimaki, and Asher Wolinsky, for assisting me in the development of the project, helping me to better focus the issue, and to present a deeper and more complete analysis. The usual caveat applies. Department of Economics, 2005 Sheridan Rd. Evanston, Il, 60208-2009. e-mail: [email protected] webpage: http://pubweb.nwu.edu/~fsq395/