Screening
Topic: Market Structures, Market Failure and Competition · NCERT: Beyond NCERT
Meaning
Screening is what the less-informed side of a deal does to draw out hidden information from the better-informed side. It is a response to asymmetric information, where one party knows more than the other. Rothschild and Stiglitz developed the idea in 1976, and Stiglitz shared the 2001 Nobel for it. Good screening reduces adverse selection, which is the problem of the riskiest people being the most eager to deal.
Example
- An insurer asks for medical tests before selling a health policy.
- A bank checks a borrower's credit score from a credit information company such as CIBIL.
- An insurer offers a menu of deductibles (the amount the buyer pays before the insurer pays). Low-risk buyers choose high-deductible plans, and by doing so they reveal what type they are.
Don't confuse with
- Signalling: the move comes from the better-informed side, which takes a costly action to prove its quality. In screening the less-informed side makes the move.