Signalling, Inequality and the Social Structure

Abstract

This paper proposes a theory of endogenous transmission of social status through signalling in the labour market. A signalling game is analysed, in which education, acting as a signalling good, determines one's position in society. The economy's degree of inequality is shown to be a determinant of whether a society is ‘aristocratic’, where high income is the source of social standing, or ‘meritocratic’, bestowing status on high ability. Each social structure shows a different balance between production efficiency and social factors such as equality or mobility.