Game Theory, Job Market and MBA Degree

 

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.

imagesS3BSOCLM

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.

MBA

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.

 

 

 

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s