A spillover‐based theory of credentialism

I propose a model in which credentials, such as diplomas, are instrumentally valuable to workers. The model avoids an important criticism of standard job market signalling models by tying a worker's wage to their output. A worker's productivity is influenced by the skills of their co‐workers, where such skills arise from an ability‐augmenting investment that is made prior to matching with co‐workers. Credentials allow workers to demonstrate their investment to the labour market, thereby allowing them to match with high‐skill co‐workers in equilibrium. Despite the positive externality associated with a worker's investment, I show how overinvestment is pervasive in equilibrium.