Education, dynamic signalling, and social distance

Abstract

In many European countries the average level of education has grown steadily over the last few generations. The paper shows how such a trend can be easily rationalized by a model that extends a standard signalling game in two directions. First, a temporal structure is induced by having two different cohorts of individuals playing the game. Second, to standard rational agents, the model postulates the existence of two classes of agents that care about their relative position in the distribution of educational choices. Conformist individuals wish to be close to the average level; status seeking individuals seek to be above it. Results show that the presence of these two classes of individuals generates an average level of education that changes and increases over time for a wide range of choice of parameters. Consequences of this increasing level of education on the behaviour of the firms are also explored.