Cursed Job Market Signaling

Abstract

We study how cursedness, the tendency to neglect how other people's strategies depend on their private information, affects information transmission in Spence's job market signaling game. We characterize the Cursed Sequential Equilibrium and show that as players become more cursed, the worker obtains less education -- a costly signal that does not enhance productivity -- suggesting that cursedness improves the efficiency of information transmission. However, this efficiency improvement depends on the richness of the message space. Revisiting the job market signaling experiment by Kübler, Müller, and Normann (2008), we find evidence consistent with our theory. Finally, we show that cursedness has implications for wage compression in labor markets.