Perfect Bayesian Equilibrium in Signaling Games: The Case of Credential Inflation in the Job Market
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Perfect Bayesian Equilibrium in Signaling Games: The Case of Credential Inflation in the Job Market

Ziming Wang 1*
1 University of Toronto
*Corresponding author: jeffziming.wang@gmail.com
Published on 13 August 2025
Journal Cover
AEMPS Vol.208
ISSN (Print): 2754-1177
ISSN (Online): 2754-1169
ISBN (Print): 978-1-80590-315-4
ISBN (Online): 978-1-80590-316-1
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Abstract

In modern labor markets, rising educational attainment among job applicants often fails to translate into corresponding productivity differences. This phenomenon, commonly referred to as “credential inflation,” raises concerns about the signaling power of education. This paper explores credential inflation through the lens of signaling games in microeconomic theory and investigates how changing cost structures and labor market screening contribute to inefficient signaling. Specifically, a Perfect Bayesian Equilibrium (PBE) model is used, where job applicants privately know their ability level and choose their education level to signal productivity to employers. When the cost of education becomes less sensitive to ability, pooling equilibria emerge, where both high- and low-ability workers choose the same level of education. As a result, education loses its signaling power and inflation of educational requirements occurs. This paper concludes that credential inflation is a rational outcome under certain market conditions and propose policy responses to mitigate its effects on labor market sorting.

Keywords:

Signaling game, Perfect Bayesian Equilibrium, Credential inflation, Labor market, Asymmetric information

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Wang,Z. (2025). Perfect Bayesian Equilibrium in Signaling Games: The Case of Credential Inflation in the Job Market. Advances in Economics, Management and Political Sciences,208,39-45.

References

[1]. Spence, M. (1973). Job Market Signaling. Quarterly Journal of Economics, 87(3), 355–374.

[2]. Weiss, A. (1995). Human Capital vs. Signaling Explanations of Wages. Journal of Economic Perspectives, 9(4), 133–154.

[3]. Arrow, K. J. (1973). Higher Education as a Filter. Journal of Public Economics, 2(3), 193–216.

[4]. Camboni, M., Niu, M., Pai, M. M., & Vohra, R. (2025). Signaling Design. arXiv preprint arXiv:2502.02328.

[5]. Araki, S., & Kariya, T. (2022). Credential inflation and decredentialization: Re-examining the mechanism of the devaluation of degrees. European sociological review, 38(6), 904-919.

[6]. Yang, H., & Yip, C. S. (2003). An economic theory of grade inflation. University of Pennsylvania.

[7]. Bangerter, A., Roulin, N., & König, C. J. (2012). Personnel selection as a signaling game. Journal of Applied Psychology, 97(4), 719.

[8]. Deming, D. J., Yuchtman, N., Abulafi, A., Goldin, C., & Katz, L. F. (2016). The value of postsecondary credentials in the labor market: An experimental study. American Economic Review, 106(3), 778–806.

[9]. Zhang, W. (2004). Game Theory and Information Economics. Shanghai People's Publishing House, Shanghai.

[10]. Yuming Xiao. (2023). Calculation of Perfect Bayesian Equilibrium in a Signaling Game. Higher Education Research, 8(4), 193-200. doi: 10.11648/j.her.20230804.20

References

[1]. Spence, M. (1973). Job Market Signaling. Quarterly Journal of Economics, 87(3), 355–374.

[2]. Weiss, A. (1995). Human Capital vs. Signaling Explanations of Wages. Journal of Economic Perspectives, 9(4), 133–154.

[3]. Arrow, K. J. (1973). Higher Education as a Filter. Journal of Public Economics, 2(3), 193–216.

[4]. Camboni, M., Niu, M., Pai, M. M., & Vohra, R. (2025). Signaling Design. arXiv preprint arXiv:2502.02328.

[5]. Araki, S., & Kariya, T. (2022). Credential inflation and decredentialization: Re-examining the mechanism of the devaluation of degrees. European sociological review, 38(6), 904-919.

[6]. Yang, H., & Yip, C. S. (2003). An economic theory of grade inflation. University of Pennsylvania.

[7]. Bangerter, A., Roulin, N., & König, C. J. (2012). Personnel selection as a signaling game. Journal of Applied Psychology, 97(4), 719.

[8]. Deming, D. J., Yuchtman, N., Abulafi, A., Goldin, C., & Katz, L. F. (2016). The value of postsecondary credentials in the labor market: An experimental study. American Economic Review, 106(3), 778–806.

[9]. Zhang, W. (2004). Game Theory and Information Economics. Shanghai People's Publishing House, Shanghai.

[10]. Yuming Xiao. (2023). Calculation of Perfect Bayesian Equilibrium in a Signaling Game. Higher Education Research, 8(4), 193-200. doi: 10.11648/j.her.20230804.20

Cite this article

Wang,Z. (2025). Perfect Bayesian Equilibrium in Signaling Games: The Case of Credential Inflation in the Job Market. Advances in Economics, Management and Political Sciences,208,39-45.

Data availability

The datasets used and/or analyzed during the current study will be available from the authors upon reasonable request.

About volume

Volume title: Proceedings of ICFTBA 2025 Symposium: Financial Framework's Role in Economics and Management of Human-Centered Development

ISBN: 978-1-80590-315-4(Print) / 978-1-80590-316-1(Online)
Editor: Lukáš Vartiak, Habil. Florian Marcel Nuţă
Conference website: https://2025.icftba.org/Galati.html
Conference date: 17 October 2025
Series: Advances in Economics, Management and Political Sciences
Volume number: Vol.208
ISSN: 2754-1169(Print) / 2754-1177(Online)

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