Human capital acquisition as a signaling device in promotion competition

We analyze an economy in which workers compete over promotion to one of a fixed number of high‐paying jobs. Hence, the probability of obtaining a promotion to such a job is a function of the worker's own ability and level of schooling as well as her/his rival's. In such an economy, a new reason for acquiring human capital emerges, obtaining an edge over potential rivals for desirable jobs. We discuss the implications of this new incentive to acquire human capital and show that low‐ability workers overinvest while high‐ability workers underinvest in schooling.