This is a study of market organization in very different settings. In the first chapter, I study how the choices by students to “rush” fraternities, and those of fraternities of whom to admit, interact with the signals that firms receive about student productivities to determine labor market outcomes. Students understand that fraternities value both academic ability and “socializing values”, and will screen out students with lesser academic abilities unless they have especially high socializing values. Students also understand that firms will see whether or not they are in a fraternity, and will use that information in their hiring decisions. I characterize possible equilibrium outcomes and then estimate the model. I identify sufficient conditions for highly-able students to perceive participation in a fraternity as tainting, so that students of intermediate abilities are over-represented in fraternity membership. That is, in equilibrium most less able students apply to fraternities, but are rejected unless they have high socializing values, while most able students do not apply to avoid being tainted in labor market outcomes from being mixed in with less able fraternity members. I show that my theory can reconcile the data on cumulative GPAs of fraternity and non-fraternity members at the University of Illinois. I structurally estimate a three signal version of the model and show the welfare and wage impacts of the fraternity for different types of students. In the second chapter, I study the sovereign borrowing market. Sovereign default often affects country’s trade relations. The defaulter’s currency depreciates while trade volume falls drastically. To explain this connection, I propose a model to incorporate real depreciation along with sovereign bankruptcy. Defaulters must exchange more of their own goods for imports, which stimulates an adjustment to the equilibrium exchange rate. I demonstrate that a default episode can imply up to a 30% real depreciation. This matches the depreciations observed in crisis events for developing countries. To avoid this, countries are willing to maintain borrowing obligations up to a realistic level of debt. In the third chapter, I develop a model of strategic grade determination by universities distinguished by their distributions of student academic abilities. Universities choose grading standards to maximize the total wages of graduates, taking into account how the grading standards affect firms’ productivity assessment and job placement. Job placement and wages hinge on a firm’s productivity assessment given a student’s university, grade and productivity signal. I identify conditions under which better universities set lower grading standards than is socially optimal, exploiting the fact that firms cannot distinguish between “good” and “bad” “A”s, while worse universities set excessively strict grading standards. In particular, a social planner finds it optimal to set stricter grading standards at better universities, whereas the opposite happens in equilibrium. I then show how increases in skilled jobs drive grade inflation, and determine when grading standards fall faster at better universities. These findings are consistent with the evolution of average cumulative GPAs at different schools over the past 50 years.
information, fraternities, grading, screening, signaling, default, depreciation
University of Illinois - Urbana-Champaign
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University of Illinois at Urbana-Champaign