Job Market Signaling

Spence's canonical model of how agents in markets with asymmetric information use costly signals to reveal their type. The original setting is the labour market: employers cannot observe worker productivity before hiring, so workers invest in education — not necessarily because it teaches useful skills, but because completing it is harder for low-ability workers, making it a credible signal of capability. The model introduces the distinction between separating equilibria (where signals successfully distinguish types) and pooling equilibria (where everyone emits the same signal and it conveys nothing). For product direction, signaling theory explains why certifications, transparency reports, and open benchmarks exist — and why they stop working once the cost of producing them drops. Read alongside Akerlof's Market for Lemons for the problem that signaling solves, and Erlei et al.'s When Life Gives You AI for how the framework applies to contemporary AI adoption.