We analyze a competitive labor market in which workers signal their productivities through education, and firms have the option of auditing to learn workers' productivities. Audits are costly and non‐contractible. We characterize the trade‐offs between signaling by workers and costly...

Subjective evaluations are widely used, but call for different contracts from classical moral‐hazard settings. Previous literature shows that contracts require payments to third parties. I show that the (implicit) assumption of deterministic contracts makes payments to third parties necessary....