Who Is A. Michael Spence? What Is His Market Signaling Theory?

Early Life and Education

Born on November 7, 1943, in Montclair, New Jersey, Spence grew up in Canada. He studied at Princeton University, the University of Oxford, where he was a Rhodes Scholar, and Harvard University.

Notable Accomplishments

Awards and Honors

His early work earned Spence the John Bates Clark Medal of the American Economic Association, which was awarded to an American economist under 40 years of age who was deemed to have made the most important and valuable contributions to the areas of economic knowledge and insight.

Spence has earned an assortment of other prestigious awards, including the John Kenneth Galbraith Prize for excellence in teaching and the David A. Wells Prize for the outstanding doctoral dissertation at Harvard. 

In 2001, Spence earned a Nobel Prize, officially titled The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, for his analysis of information asymmetry. His work specifically focused on how individuals can use their education credentials as a signal to potential employers. He was awarded the Nobel Prize jointly with George Akerlof and Joseph Stiglitz, professors at the University of California at Berkeley and Columbia University, respectively.

Information Economics

Spence is most well known for his theory of market signaling under conditions of asymmetric information. This model is mostly applied to labor markets, but it can be referred to in other market contexts. Market signaling can occur when a job candidate has better information about their own productivity than a prospective employer and productivity varies across different types of workers.

Higher productivity candidates have an incentive to credibly communicate their type to the prospective employer by engaging in some costly activity that is only possible (or more likely possible) for a higher productivity employee. In Spence's original 1973 paper, this signal consisted of obtaining a college degree.

By spending the time and money to complete a degree, an activity that requires a certain amount of skill, intelligence, work ethic, etc. to succeed, a job market candidate can signal their higher productivity to prospective employers.

It is important to note that the signal has value to the job candidate independent of any increase in skill or knowledge obtained in the course of their studies; they might not even gain any new skills, knowledge, or other increase in ability from their education. This is in contrast to previous (and still common) theories of education that explain it as an investment in human capital.    

Spence led important investigations of development economics as Chair of the Commission on Growth and Developments, sponsored by several national governments and the World Bank, between 2006 and 2010.

Development Economics

Spence led important empirical investigations of development economics as Chair of the Commission on Growth and Developments, sponsored by several national governments and the World Bank between 2006 and 2010.

In general, these studies documented the success of the export-led growth strategy, finding that 13 economies pursuing the strategy had consistently grown 7% or more annually for over 25 years. 

Monopolistic Competition and Industrial Organization

Spence has published several theoretical papers on monopolistic competition, or markets characterized by firms who produce differentiated products. His models demonstrate how monopolistic competition can lead to distortion of markets and misallocation of resources (relative to perfect competition), which he argues might be remedied through various forms of regulation.

His work on this topic was cited as part of his Bates Medal award from the American Economic Association.

The Bottom Line

Spence has made notable contributions to the field of economics, and in particular to theories around information economics, development economics, monopolistic competition, and industrial organization.

His win of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel in 2001 made him one of over twenty American Nobel laureates in the field of economics since 2000.