The cost of standing out
New research finds that the waste from signaling contests, such as college admissions, stays the same regardless of how hard the test is.
When a student crams for the SAT, a job applicant polishes a résumé, or a peacock grows an elaborate tail, they are engaging in what economists call signaling: costly behavior to distinguish themselves from less able competitors. Despite conveying useful information, such behavior is, almost by definition, also wasteful. But how wasteful?
Recent work by Alex Frankel (Chicago Booth) and Navin Kartik (Yale) provides an answer. They revisit a canonical signaling model based on Michael Spence’s Nobel-Prize-winning framework from 1973, and analyze the “waste ratio”: the fraction of a person’s (or peacock’s) gain from perception that is burned away through costly effort. This waste, it turns out, depends on two things: how steeply rewards rise with perceived ability, and how much of a cost advantage abler people enjoy at producing the signal. In a leading mathematical specification, nothing else matters, and the waste ratio has a surprisingly simple formula. The qualitative takeaways—that waste rises with reward steepness and falls with cost advantage—hold more generally.
The analysis reveals that how inherently hard or easy a test is does not affect how much waste it generates. An abler student needs fewer preparation hours to reach any given score, and so is willing to study more than less able students. Changing the test difficulty uniformly for all students just rescales what each score means. Make the SAT harder and a 1400 becomes the new 1500; make it easier and the reverse. Either way, students put in the same hours in studying to the test—real effort is the same—and the waste is unchanged.
Recent trends, such as the shorter and less complex digital SAT introduced to reduce student stress, have moved tests in one direction; some critics argue that tests should instead be made harder. The paper argues for focusing not on how difficult a test is in absolute terms, but instead on whether it changes the relative difficulty for different students. Put another way, what matters for waste is how much costlier good performance on the test is for less able students than more able ones.
Just as important is the reward side. Frankel and Kartik put it thus: “As long as admissions at selective colleges resemble winner-take-all signaling tournaments with many competitors, the process is likely to dissipate significant surplus, regardless of how the testing technology is calibrated.”
The rewards theme also applies more broadly to winner-take-all societies. When the benefits from being successful—or being perceived well—are more unequal, the rewards from signaling are steeper. The authors thus conclude that countries like the US are likely to have more signaling waste than lower-inequality countries like Canada or Sweden.