Explain the differences and similarities between screening and signaling. Is one better than the other?

Question

What will be an ideal response?

Answer 1

Screening and signaling are both ways in which participants in markets characterized by asymmetric information try to overcome this problem by restoring the information balance. The main difference between the two is who is taking the action. With signaling, the party with more information tries to convey that information to the other party; with screening, the party with less information tries to discover information held by the other party. It is hard to say whether one is better or worse than the other, but it is worth pointing out that signals can be intentionally misleading. For example, if it is not prohibitively costly to do so, a low-ability worker may try to send the same signal as a high-ability worker (falsely sending the message "I am a high-ability worker"), if doing so secures a higher wage. Since signaling is an action taken by the party with less information, it is not clear that this could ever be done in a way to mislead. (The party being screened could, however, try to mislead the screening party, but that affects the usefulness of screening in some cases, but not its ethical value.)