Financial Definition of SPENCE
What It Is
A. Michael Spence is an economist who won the 2001 Nobel Prize for his work in market-signaling theory.
How It Works
Born in New Jersey in 1943 and raised in Canada, Michael Spence attended Princeton University, then received a Rhodes scholarship to study mathematics at Oxford. He entered the Ph.D. program in economics at Harvard in 1968. In 1973, Spence became an economics professor at Stanford, but returned to Harvard in 1975. One year later, undergraduates Bill Gates and Steve Ballmer enrolled in his graduate economic theory course (both got A's).
Why It Matters
Spence developed the theory of signaling to show how people communicate information about each other to avoid economic problems. Specifically, he showed that having a college degree signals a person's intelligence and ability to potential employers.
Spence also applied his theory to show that companies signal profitability to the market by paying large dividends, and that manufacturers signal quality by guaranteeing their products.
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