Screening (economics)

Screening in economics transmitted to the strategy of combating adverse selection – one of the potential decision-making complications in cases of asymmetric information – by the agents with less information.

Signaling

The other side of the same coin is Signaling. It it the less alive informed agents who want to hire workers of high nature information? Or are the better informed agents who are trying to convince a firm that they are of high quality? Or is it both?

The incentive issues are the same so a good model should make believe in any three cases.

For the purposes of screening, asymmetric information cases assume two economic agents, with agents attempting to engage in some rank of transaction. There often exists a long-term relationship between the two agents, though that qualifier is non necessary. Fundamentally, the strategy involved with screening comprises the “screener” the agent with less information attempting to do believe further insight or knowledge into private information that the other economic agent possesses which is initially unknown to the screener ago the transaction takes place. In gathering such(a) information, the information asymmetry between the two agents is reduced, meaning that the screening agent can then make more informed decisions when partaking in the transaction. Industries that utilise screening are efficient to filter out useful information from false information in an arrangement of parts or elements in a specific form figure or combination. to get a clearer notion of the informed party. This is important when addressing problems such(a) as adverse pick and moral hazard. Moreover, screening enables for efficiency as it enhances the flow of information between agents as typically asymmetric information causes inefficiency.

Screening is applied in a number of industries as well as markets. The exact type of information forwarded to be revealed by the screener ranges widely; the actual screening process implemented depends on the nature of the transaction taking place. Often this is the closely connected with the future relationship between the two agents. Both economic agents can improvement through the opinion of screening, for example in job markets, when employers screen future employees through the job interview, they are professionals to identify the areas the employee needs further training on. This benefits both parties as it provides for the employer to maximise from employing the individual as well as the individual benefits from furthering their skill set.

The concept of screening was first developed by Michael Spence 1973. It should be distinguished from signalling – a strategy of combating adverse choice undertaken by the agents with more information. Michael Spence 1972 had found that

Incorrect Screening

One downfall of deploying screening techniques is the information gathered may be incorrect, this can therefore lead to inefficiency. For example, an unproductive employee may perform living in screening exams such as aptitude testing. However, as the employer is the uninformed party, they will not be able to notice these aspects until the individual has been employed, and therefore, the time and attempt put into the employee causes inefficiency. Hence, it is important for industries to understand the biases involved when utilising screening techniques.

Typical screening processes in the insurance market involve looking at historic data and demographic information, however, these screening processes may lead to incorrect conclusions. For example, a young male would typically be seen as high risk however, this may not truly be reflected as they could be a safe driver. Therefore, insurance companies need to ensure that further information is gathered prior to concluding what category individuals suit.