What is the difference between screening and signaling
These problems do not exist in markets in which products are simple and easily evaluated. There is little need for this behavior in many agricultural markets, for instance. One way a seller can signal the quality of its product is by offering guarantees or warranties.
If a firm offers a warranty on a poor product, it will suffer a loss. Therefore, it is in the firm's interests to only offer a warranty on a quality product.
The warranty tells potential buyers that the firm will stake money on its belief that it has a good-quality product. Another way a firm can signal quality is by building a brand name. A brand name is valuable only if consumers associate it with quality, and the firm can build this association only with time and resources. Once a brand name is established, it is in the interests of the firm to protect it by not offering a poor-quality product with its brand name.
When a firm with an established brand name does offer a poor-quality product, it usually puts a different name on the product so as not to endanger the public's perception of its brand name. Signaling plays an important role in the labor market. An employer has little information about a prospective employee, and cannot expect truthful answers if he asks whether the applicant is intelligent, has leadership qualities, and is responsible.
Instead the applicant must try to prove that he has these qualities. A college education is a way of signaling intelligence and perseverance. Leadership can be signaled by extracurricular activities. As a result, some students seek leadership positions primarily for their value as ways to signal leadership to future employers. The purpose of a resume is to list those activities that will signal attractive qualities to potential employers. The fact that a college education can signal qualities to employers has raised some interesting questions about why people get college educations.
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For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: email available below. Please note that corrections may take a couple of weeks to filter through the various RePEc services. Economic literature: papers , articles , software , chapters , books. FRED data. My bibliography Save this paper. Registered: Joseph E.
Stiglitz Andrew Murray Weiss. In this paper we analyze games in which there is trade between informed and uninformed players. The informed know the value of the trade for instance, the value of their productivity in a labor market example ; the uninformed only know the distribution of attributes among the informed. The informed choose actions education levels in the Spence model ; the uninformed choose prices wages of interest rates.
We refer to games in which the informed move first as signaling games - they choose actions to signal their type. Games when the uninformed move first are referred to as screening games. We show that in sequential equilibria of screening games same contracts can generate positive profits and others negative profits, while in signaling games all contracts break even.
However, if the indifference carves of the informed agents satisfy what roughly would amount to a single crossing property in two dimensions, and some technical conditions hold, then all contacts in the screening game break even, and the set of outcomes of the screening game is a subset of the outcomes of the corresponding signaling game. In the postscript we take a broad view of the strengths and weakness of the approach taken in this and other papers to problems of asymmetric information, and present recommendations for how future research should proceed in this field.
In the postscript we take a broad view of the strengths and weakness of the approach taken in this and other papers to problems of asymmetric information, and present recommendations for how future research should proceed in this field. Download Citation Data. Share Twitter LinkedIn Email. Technical Working Paper DOI Issue Date November