Screening and Signaling

I had intended to give screening and signaling each their own post. There is no need for it. Though the Nobel people thought of them as important in defining information asymmetry, my own analysis is that they are nowhere near as important as adverse selection.

Where adverse selections explains the power relationship between two parties, screening and signaling are tactics that help the parties mitigate information asymmetry. They are not complicated. Both are easily explainable.

Signaling, in economic terms, is giving a buyer signs of your suitability to enter into an economic transaction. Let’s say you are applying for a job, you advertise the fact that you have a degree as a ‘signal’ that you are a suitable choice for the employer to hire, ceteris paribus. Meaning your degree puts you ahead of any candidate without a degree.

Screening means that you don’t try to sell your wares to anyone who doesn’t have the means or interest to buy them. It means you test them before you give them your pitch. The same way the credit card companies check your credit score before they decide whether they are going to give you a card.

Everybody does these things. We signal and screen constantly. I found the economic definitions too limited in scope to be of much use. If we just look around we can plainly see numerous non-economic examples of signaling and screening.

Screening and signaling will get some use, I am sure. Most of the mileage I get from the concept of information asymmetry will come from the idea of adverse selection. Adverse selection is so far the best terms I can find which describes the situations I am attempting to confront.

One comment

  1. […] adverse selection; I did not know how to make use of the other types of information asymmetries: signaling and screening. It took me a few more years of thinking about information asymmetries before I was able to make […]

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