Michael Spence

Michael Spence studied mathematics and philosophy at Princeton University and philosophy at Oxford as a Rhodes Scholar before receiving his PhD in economics from Harvard. He taught at Harvard and at Stanford, where he served as Dean of the Graduate School of Business from 1990 to 1999. Spence shared the 2001 Nobel Prize in Economics with George Akerlof and Joseph Stiglitz. His key contribution is Job Market Signaling theory — first developed in his 1973 paper and extended in his book 'Market Signaling' (1974). The theory addresses a situation of information asymmetry where workers know their own productivity but employers do not. Spence showed that in such situations, high-productivity workers have an incentive to acquire education as a costly signal of their quality, even if education does not itself increase productivity — because the cost of acquiring the signal differs between high and low-productivity types. This signaling equilibrium explains why education commands a wage premium independent of its direct productivity effects. Signaling theory has been enormously influential beyond labour markets: it applies to corporate dividends as signals of future earnings, IPO pricing and lock-up periods as signals of company quality, and credit market screening. Spence has also done important research on economic growth and development in emerging markets.