Screening game

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A screening game is a two-player principal–agent type game used in economic and game theoretical modeling. Principal–agent problems are situations where there are two players whose interests are not necessarily matching with each other, but where complete honesty is not optimal for one player. This will lead to strategies where the players exchange information based in their actions which is to some degree noisy. This ambiguity prevents the other player from taking advantage of the first. The game is closely related to signaling games, but there is a difference in how information is exchanged.

Principal–agent problem Agency Problem

The principal–agent problem, in political science and economics, occurs when one person or entity is able to make decisions and/or take actions on behalf of, or that impact, another person or entity: the "principal". This dilemma exists in circumstances where agents are motivated to act in their own best interests, which are contrary to those of their principals, and is an example of moral hazard.

Game theory is the study of mathematical models of strategic interaction between rational decision-makers. It has applications in all fields of social science, as well as in logic and computer science. Originally, it addressed zero-sum games, in which one person's gains result in losses for the other participants. Today, game theory applies to a wide range of behavioral relations, and is now an umbrella term for the science of logical decision making in humans, animals, and computers.

In the principal-agent model, for instance, there is an employer (the principal) and a worker (the agent). The worker has a given skill level, and chooses the amount of effort he will exert. If the worker knows his ability (which is given at the outset, perhaps by nature), and can acquire credentials or somehow signal that ability to the employer before being offered a wage, then the problem is signaling. What sets apart a screening game is that the employer offers a wage level first, at which point the worker chooses the amount of credentials he will acquire (perhaps in the form of education or skills) and accepts or rejects a contract for a wage level. It is called screening, because the worker is screened by the employer in that the offers may be contingent on the skill level of the worker.

Some economists use the terms signaling and screening interchangeably, and the distinction can be attributed to Stiglitz and Weiss (1989).

See also

In game theory, cheap talk is communication between players that does not directly affect the payoffs of the game. Providing and receiving information is free. This is in contrast to signaling in which sending certain messages may be costly for the sender depending on the state of the world.

In contract theory, signalling is the idea that one party credibly conveys some information about itself to another party. For example, in Michael Spence's job-market signalling model, (potential) employees send a signal about their ability level to the employer by acquiring education credentials. The informational value of the credential comes from the fact that the employer believes the credential is positively correlated with having greater ability and difficult for low ability employees to obtain. Thus the credential enables the employer to reliably distinguish low ability workers from high ability workers.

Signalling theory body of theoretical work examining communication between individuals

Within evolutionary biology, signalling theory is a body of theoretical work examining communication between individuals, both within species and across species. The central question is when organisms with conflicting interests, such as in sexual selection, should be expected to provide honest signals rather than cheating. Mathematical models describe how signalling can contribute to an evolutionarily stable strategy.

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Michael Spence American economist

Andrew Michael Spence is a Canadian American economist and recipient of the 2001 Nobel Memorial Prize in Economic Sciences, along with George Akerlof and Joseph E. Stiglitz, for their work on the dynamics of information flows and market development.

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Paul Milgrom American economist

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Signaling game

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Screening in economics refers to a strategy of combating adverse selection, one of the potential decision-making complications in cases of asymmetric information, by the agent(s) with less information. The concept of screening was first developed by Michael Spence (1973), and should be distinguished from signalling, a strategy of combating adverse selection undertaken by the agent(s) with more information.

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