Every now and then, the world suddenly learns that a perfectly competent worker faked his credentials.  Consider the case of MIT’s former head of admissions:

Marilee Jones, the dean of admissions at the Massachusetts Institute
of Technology… admitted that she had fabricated her own educational
credentials and resigned after nearly three decades at MIT. Officials of
the institute said she did not have even an undergraduate degree.

misrepresented my academic degrees when I first applied to MIT 28 years


Jones, 55, originally from Albany, New York, had on
various occasions represented herself as having degrees from three
upstate New York institutions: Albany Medical College, Union College and
Rensselaer Polytechnic Institute. In fact, she had no degrees from any
of those places, or anywhere else, MIT officials said.

A spokesman
for Rensselaer said Jones had not graduated from there, though she did
attend as a part-time nonmatriculated student during the 1974-75 school
year. The other colleges said they had no record of her.

When credential scandals break, fans of the signaling model of education often run a victory lap.  Should they?  On the surface, credential scandals seem inconsistent with both the standard human capital model and the signaling model.  Remember: Both models predict that the more-educated will be better workers than the less-educated.  In the human capital model, educated workers are better because school instills job skills.  In the signaling model, educated workers are better because school certifies job skills.  From both perspectives, then, the fact that Marilee Jones could fake her credentials, then do a fine job for 28 years, is weird.

On deeper reflection, however, the signaling model makes credential scandals less weird than the human capital model.  In the human capital model, there is no need to fake credentials; the market knows what you can do, and pays you accordingly.  In the signaling model, in contrast, the market has to guess what you can do.  If the initial guess is unfavorable, a qualified worker may fail to even land an interview, much less a job. 

So what?  Ponder a job-seeker’s incentive to lie in the following two scenarios.  In the first scenario, you lack both credentials and the skills those credentials normally indicate.  In the second, you’re a diamond in the rough – someone whose credentials understate their true skills.

Scenario #1: In the absence of deception, the market will correctly guess that you’re not good enough for the job.  What does lying get you?  If your employer fires you as soon as he discovers your incompetence, you still get paid above your true market value for a few weeks or months.  Given a typical firing-averse employer, you may get paid above your true market value until the next recession.

Scenario #2: In the absence of deception, the market will incorrectly guess that you’re not good enough for the job.  What does lying get you?  Your big break!  Your lie wins you an opportunity, and that opportunity allows you to win an employer’s esteem – and start permanently earning your true market value.

The incentive to lie in Scenario #1 is plain.  But in Scenario #2, the incentive to lie is overwhelming!  If you’re really a diamond in the rough, one well-crafted lie can change your life for the rest of your life.  Or at least 28 years.

If all this is true, why do firms so often punish credential fraud with termination?  “Credibility” is the obvious answer.  Forgiving credential fraud committed in the past is a great way to encourage more credential fraud in the future. 

But this answer dodges the more fundamental question: Why should firms detest credential fraud so much in the first place?  In the human capital model, it’s unclear.  When you pay workers for their actual productivity, there’s little need to police what workers claim about their productivity, because so little hinges on such claims. 

In the signaling model, in contrast, perception is all-important, because you pay workers for their perceived productivity.  Harshly punishing credential scandals sends a valuable message to all your present and future workers: “Never mess with my perceptions.”

So yes, credential scandals do support the signaling model.  But instead of running victory laps, fans of signaling should carefully explain why these scandals are weird, and how their preferred model makes the weirdness normal.