A Noisy Screening Model of Education

Abstract. This paper presents a screening model of education in which students having private information about their innate abilities are noisily tested in school. The aim is to explore the effect of noise on the screening equilibrium. By assuming that labour contracts take the form of reward schedules based on inaccurate academic qualifications, one can show that separating equilibrium turns out to be unique but insufficiently revealing, and both high and low ability types become overeducated. Also, even when separation is uncompleted, we show that a firm could still profitably cream‐skim the market so that no pooling equilibrium exits. As in the non‐noise case, the existence of an equilibrium is assured when the student population is made up mainly of a small proportion of high‐ability individuals, but in that case the fraction required is even lower.