Cliché-“The MBA changed my life.” What it really means: “A fantastic career, a great social life and a healthy bank balance…three of the things I had before I started the program.”
– Sameer Kamat, author of Beyond the MBA Hype
Michael Spence is a Noble Prize winning economist, who came up with job market signaling model. In this model degree is a signal given by candidate about his competence to employer. Here candidate knows if he is competent or not, but employer doesn’t. Candidate’s degree is a signal to employer to take decision.
Let us assume that MBA degree differentiates between competence levels – High vs. Average. Since it is a game theory, we assume that all players are rational i.e. they know if they are competent or not. MBA degree is not easy to get and costs lot of money.
Now a person with MBA is paid Rs.1500000 and non MBA Rs.800000, while degree costs Rs.X.
At the end of the year a MBA nets -1500000-X, a degree will make sense only if (1500000-X) > 800000, else a person is better off without MBA degree. Now a person with lesser competence wants to do MBA, degree will cost him more (in terms of efforts, opportunity cost, time required etc.) say 2X. So if 800000 > (1500000-2X) then degree is productive for him. If we solve two equations, we find that MBA degree should be priced between Rs.350000 and Rs.700000. Now given fact that most of the candidates are average (as per normal distribution), it makes sense to price degree at Rs.350001 than at Rs.699999.
Now if degree is priced too high, then all candidates are sailing in same boat, they will not opt for MBA degree. In this case the employer is beneficiary because he will then offer everyone low salary.