Suppose there are two types of workers, “stars” and “everyone else” and both of them would like jobs at investment banks like SG Cowen. Productivity equals 100,000 for the stars, and 50,000 for everyone else. 80 percent of workers in the population are “everyone else” (meaning not stars) in and 20% are stars. Suppose none of the screening methods investment banks use are effective. However, workers may signal their ability by earning an MBA at an elite business school. The cost is 30,000 for the stars, and 60,000 for everyone else. All firms pay workers their productivity (if there is signaling), or their expected productivity (if there is no signaling). Workers are employed for only a single period after being hired.

a. How is it possible that the cost of an MBA differs by ability? Tippie’s website advertises in-state tuition at Iowa for the full-time MBA program as $40,000 and does not distinguish between ability.

b. Is an MBA an effective signal? Discuss the three criteria.

c. Now suppose the population is evenly divided between stars and ‘everyone else’. Does this change your answer to (b)?

d. Discuss your results to (b) and (c). Intuitively, why does the percent of the population that is a star impact whether getting an MBA is a beneficial choice for a star?