<p>Signaling is the informed side taking actions to reduce (or maintain, depending on the private types) the information asymmetry. For example, high skill workers getting certifications to signal their productivity so as earn a higher wage. Or low skill workers trying to mimic the high-skilled's behavior as much as possible so that they cannot be separated. </p>

<p>Screening is the uninformed side taking actions to reduce the information asymmetry. For example, monopolists use price discrimination strategies to identify customers with high vs low willingness to pay and charge them accordingly. </p>

CC BY-SA 4.0
2019-09-26T21:28:33.747Z
Hmm, i.e. a broker, or a market maker or an intermediary in general, who is a monopolist in some OTC market, to make the matching in a bilateral trade, she needs to screen the parties, to know their types. She does so, because she knows that if she wants to make profits, she has to control the problem and designate the kind of investors, am I right?
Nav89
CC BY-SA 4.0
2019-09-27T02:27:59.773Z
@Nav89: I'm not sure I follow your example completely. But that a broker who wants to bring together a potential buyer and a potential seller should screen the types of them sounds like a right application of a screening game.
Herr K.
CC BY-SA 4.0
2019-09-27T04:59:18.250Z
Hence, in order to do so, we need the constraints for indivifual rationality and incentive compatibility. For every type of investor we have two constraitns, an \textbf{IR} constraint and an \textbf{IC} constraint, which means we have four constraints in total. Some of these constraints are binding and some others are redundant. I thinke this is how the whole story goes...
Nav89
CC BY-SA 4.0
2019-09-27T05:01:54.017Z
@Nav89: Sounds like you're on the right track.
Herr K.
CC BY-SA 4.0
2019-09-27T05:09:09.080Z
Than you very much! It is very important to know the intuition behind these problems more than solving the maths, which sometimes can be extremely hordcore :)
Nav89
CC BY-SA 4.0
2024-09-23T16:11:29.827Z
@HerrK. I think there is paper saying that mid-skill is trying to get certificates, while the high and low skilled ones are not.
High GPA
CC BY-SA 4.0
2024-09-23T17:57:23.457Z
I'd be interested to read that paper. Can you provide more information for me to locate that paper please? @HighGPA
Herr K.
CC BY-SA 4.0
2024-09-23T19:47:59.870Z
@HerrK. https://host.kelley.iu.edu/riharbau/cs-randfinal.pdf
High GPA
CC BY-SA 4.0
2024-09-23T19:50:03.003Z
@HerrK. Something like the princess doesn't need the Oxford brand, but middle class child does
High GPA
CC BY-SA 4.0
2024-09-24T04:24:31.210Z
@HighGPA: Thanks for the pointer. Interesting paper, though the model is really an extension of the classical education signaling model by allowing the receiver to get an extra noisy signal about the sender's type. At any rate, I don't think this affects my answer in a substantive way, since I was using the classical signaling model only as an example.
Herr K.
CC BY-SA 4.0
2019-09-26T21:17:27.043Z
2019-09-26T21:17:27.043Z
Herr K.
<p>The classic literature refers to the problem where information asymmetry exists between an informed and an uninformed counterpart as the adverse selection problem, but how can we verify what kind of such a game is? Namely, how can we know that such a game is a screening game or a signaling one? </p>

<game-theory><mathematical-economics><bayesian-game>
Adverse selection problem
Nav89
# Adverse selection problem

(Asked by: username_0 on 2019-09-26)

The classic literature refers to the problem where information asymmetry exists between an informed and an uninformed counterpart as the adverse selection problem, but how can we verify what kind of such a game is? Namely, how can we know that such a game is a screening game or a signaling one?

**Tags:** game-theory, mathematical-economics, bayesian-game

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## 1 answers

### Answer by username_1 on 2019-09-26. Score: 7 | Accepted answer

Signaling is the informed side taking actions to reduce (or maintain, depending on the private types) the information asymmetry. For example, high skill workers getting certifications to signal their productivity so as earn a higher wage. Or low skill workers trying to mimic the high-skilled's behavior as much as possible so that they cannot be separated.

Screening is the uninformed side taking actions to reduce the information asymmetry. For example, monopolists use price discrimination strategies to identify customers with high vs low willingness to pay and charge them accordingly.

> **Comments:**
> **username_0**: Hmm, i.e. a broker, or a market maker or an intermediary in general, who is a monopolist in some OTC market, to make the matching in a bilateral trade, she needs to screen the parties, to know their types. She does so, because she knows that if she wants to make profits, she has to control the problem and designate the kind of investors, am I right?  
> **username_1**: @Nav89: I'm not sure I follow your example completely. But that a broker who wants to bring together a potential buyer and a potential seller should screen the types of them sounds like a right application of a screening game.  
> **username_0**: Hence, in order to do so, we need the constraints for indivifual rationality and incentive compatibility. For every type of investor we have two constraitns, an \textbf{IR} constraint and an \textbf{IC} constraint, which means we have four constraints in total. Some of these constraints are binding and some others are redundant. I thinke this is how the whole story goes...  
> **username_1**: @Nav89: Sounds like you're on the right track.  
> **username_0**: Than you very much! It is very important to know the intuition behind these problems more than solving the maths, which sometimes can be extremely hordcore :)  
> **username_2**: @HerrK. I think there is paper saying that mid-skill is trying to get certificates, while the high and low skilled ones are not.  
> **username_1**: I'd be interested to read that paper. Can you provide more information for me to locate that paper please? @HighGPA  
> **username_2**: @HerrK. https://host.kelley.iu.edu/riharbau/cs-randfinal.pdf  
> **username_2**: @HerrK. Something like the princess doesn't need the Oxford brand, but middle class child does  
> **username_1**: @HighGPA: Thanks for the pointer. Interesting paper, though the model is really an extension of the classical education signaling model by allowing the receiver to get an extra noisy signal about the sender's type. At any rate, I don't think this affects my answer in a substantive way, since I was using the classical signaling model only as an example.  

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