• Assume the example of two types of workers, a low-productivity type and a high productivity
type. A marginal education unit costs less for the high-productivity worker
than for the low-productivity worker. If as a result the indifference curves of the two
worker types to obtain education are such that they cross (only) in a single point, then
it is possible for a firm to identify and offer a contract the utility of which lies in between
the indifference curves of the two types. This contract would separate the strategies of
the two types such that it is optimal to obtain different amounts of education for each
worker. This will lead to a separating equilibrium where firms are able to identify the
type of worker by his/her signal, i.e. the level of education consumed, and pay them
accordingly for their efforts.
• In general, we only need the single crossing, i.e. the Spence-Mirlees condition to
achieve the separating equilibrium.