Public information, education and welfare

We study investments in education made by a continuum of individuals under imperfect information on returns. In the model, the wage accruing to single units of human capital is bargained in the labour market. In addition, this wage depends positively on a stochastic fundamental and, negatively, on the aggregate supply of human capital. At the time of investment, any agent observes a public and a private signal of the fundamental. We show that an increase in the precision of the public signal has an ambiguous impact on the expected social welfare. On the one hand, social welfare improves as schooling decisions become closer to those decisions that would be made under perfect information. On the other hand, social welfare deteriorates as externalities and coordination failures become more severe. The key result of our analysis is that an increase in the quality of public information turns out to be welfare improving, unless the distortions on the labour market are particularly strong.