Screening (economics)

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Screening in economics refers to a strategy of combating adverse selection, one of the potential decision-making complications in cases of asymmetric information. The concept of screening was first developed by Michael Spence (1973),[1] and should be distinguished from signalling, which implies that the informed agent moves first.

For purposes of screening, asymmetric information cases assume two economic agents—which we call, for example, Abel and Cain—where Abel knows more about himself than Cain knows about Abel. The agents are attempting to engage in some sort of transaction, often involving a long-term relationship, though that qualifier is not necessary. The "screener" (the one with less information, in this case, Cain) attempts to rectify this asymmetry by learning as much as he can about Abel.

The actual screening process depends on the nature of the scenario, but is usually closely connected with the future relationship.

In education economics, screening models are commonly contrasted with human capital theory. In a screening model used to determine an applicant's ability to learn, giving preference to applicants who have earned academic degrees reduces the employer's risk of hiring someone with a diminished capacity for learning.

Examples[edit]

  • Second degree price discrimination is an example of screening whereby a seller offers a menu of options and the buyer's choice reveals his private information. For example, a business traveler that refuses a weekend stay over reveals to the airline that he is in fact a business traveler and therefore has a higher willingness to pay than a leisure traveler. As another example, a consumer with a high willingness to pay for quality may choose to purchase a more expensive iPod with 128GB of memory to a cheaper version with less memory.
  • An employer seeking a salesperson may offer a contract with a low base salary supplemented with a commission when sales are made. A potential employee who privately knows he is bad at sales will self-select away from this firm while a potential employee who privately knows he is good at sales would accept such a contract.

See also[edit]

References[edit]

  1. ^ Spence, A. M. (1973). "Job Market Signaling". Quarterly Journal of Economics 87 (3): 355–374. doi:10.2307/1882010. JSTOR 1882010.