Screening (economics)
Encyclopedia
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 is first developed by Michael Spence
(1973), and should be distinguished from signalling
, which implies that the informed agent moves first.
For purposes of screening, asymmetric information cases assume two economic agent
s—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.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
refers to a strategy of combating adverse selection
Adverse selection
Adverse selection, anti-selection, or negative selection is a term used in economics, insurance, statistics, and risk management. It refers to a market process in which "bad" results occur when buyers and sellers have asymmetric information : the "bad" products or services are more likely to be...
, one of the potential decision-making complications in cases of asymmetric information. The concept of screening is first developed by Michael Spence
Michael Spence
Andrew Michael Spence is an American economist and recipient of the 2001 Nobel Memorial Prize in Economic Sciences, along with George A. Akerlof and Joseph E. Stiglitz, for their work on the dynamics of information flows and market development. He conducted this research while at Harvard University...
(1973), and should be distinguished from signalling
Signalling (economics)
In economics, more precisely in contract theory, signalling is the idea that one party credibly conveys some information about itself to another party...
, which implies that the informed agent moves first.
For purposes of screening, asymmetric information cases assume two economic agent
Agent (economics)
In economics, an agent is an actor and decision maker in a model. Typically, every agent makes decisions by solving a well or ill defined optimization/choice problem. The term agent can also be seen as equivalent to player in game theory....
s—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
Database transaction
A transaction comprises a unit of work performed within a database management system against a database, and treated in a coherent and reliable way independent of other transactions...
, 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
Education economics
Education economics or the economics of education is the study of economic issues relating to education, including the demand for education and the financing and provision of education...
, screening models are commonly contrasted with human capital
Human capital
Human capitalis the stock of competencies, knowledge and personality attributes embodied in the ability to perform labor so as to produce economic value. It is the attributes gained by a worker through education and experience...
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
- BankBankA bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s will often screen people interested in borrowing money in order to weed out those who won't be able to pay it back. Banks might ask potential borrowers for their financial history, job securityJob securityJob security is the probability that an individual will keep his or her job; a job with a high level of job security is such that a person with the job would have a small chance of becoming unemployed.-Factors affecting job security:...
, reason for borrowing, assetAssetIn financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
s, educationEducationEducation in its broadest, general sense is the means through which the aims and habits of a group of people lives on from one generation to the next. Generally, it occurs through any experience that has a formative effect on the way one thinks, feels, or acts...
, experienceExperienceExperience as a general concept comprises knowledge of or skill in or observation of some thing or some event gained through involvement in or exposure to that thing or event....
and so on. - A firm's interviewInterviewAn interview is a conversation between two people where questions are asked by the interviewer to obtain information from the interviewee.- Interview as a Method for Qualitative Research:"Definition" -...
process is a method of screening, using the conversation to learn about the person's personality (by way of mannerisms, attitude and dress) as well as other factors. - The dating and flirtingFlirtingFlirting is a playful, romantic, or sexual overture by one person to another subtly indicating an interest in a deeper relationship with the other person, and can involve verbal communication as well as body language...
that goes on every day is a form of screening, where people use a large variety of cues to avoid undesirable mates.