Education · Economics of Education

Which statements correctly describe the application of Signalling Theory (Michael Spence) regarding economic returns to higher education? 1. The theory suggests that education functions as a costly, credible signal sent by employees (agents) to employers (principals) regarding their unobserved traits and quality. 2. Signalling theory better explains empirical findings, such as the earning disparity across different majors (e.g., Science majors earning highest), than the Human Capital Model. 3. The credibility of a major (signal) is inversely proportional to its graduate completion rate (i.e., lower completion rate implies higher cost and greater credibility). 4. The theory posits that the primary purpose of education is to increase the overall productivity of human resources through acquired skills and training (Human Capital Theory).