A high quality worker, G1, and a low quality worker, G2, apply for a 4-year position at a consulting firm. Both ponder going to college for 4 years to signal high quality. G1 incurs no cost other than tuition. G2 incurs additional (mental) cost of $20,000 per year. The consulting firm wants to hire a high quality worker.
- Assume the time students go to college is set at 4 years and cannot be changed. If the firm offers quality-separating wages what premium should the firm offer to college graduates? What are the lower and upper thresholds?
- Now assume the time students go to college is not predetermined. The firm that wants to hire a high quality worker now sets a salary premium of $30,000 instead. What is the quality-separating college time?