Long-Term Labor Market Consequences of Costly Signaling: Evidence from a Natural Experiment

Abstract

We study a unique reform in an Indian state that increased penalties for cheating on public exams required for high school graduation. This led to a massive decline in percentages of students graduating high school. Average wages for those subject to the reform and also the premium for the students graduating have increased over the next decade or so. We interpret the reform as reducing the cost of signaling high ability by obtaining a diploma, thereby potentially leading to a shift from a pooling to a separating equilibrium.