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Sorting Out the Differences Between Signaling and Screening Models

  • Joseph Stiglitz
  • Andrew Weiss

In this paper we analyze games in which there is trade between informed and uninformed players. The informed know the value of the trade (for instance, the value of their productivity in a labor market example); the uninformed only know the distribution of attributes among the informed. The informed choose actions (education levels in the Spence model); the uninformed choose prices (wages of interest rates). We refer to games in which the informed move first as signaling games - they choose actions to signal their type. Games when the uninformed move first are referred to as screening games. We show that in sequential equilibria of screening games same contracts can generate positive profits and others negative profits, while in signaling games all contracts break even. However, if the indifference carves of the informed agents satisfy what roughly would amount to a single crossing property in two dimensions, and some technical conditions hold, then all contacts in the screening game break even, and the set of outcomes of the screening game is a subset of the outcomes of the corresponding signaling game. In the postscript we take a broad view of the strengths and weakness of the approach taken in this and other papers to problems of asymmetric information, and present recommendations for how future research should proceed in this field.

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File URL: http://www.nber.org/papers/t0093.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Technical Working Papers with number 0093.

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Date of creation: Nov 1990
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Handle: RePEc:nbr:nberte:0093
Note: EFG
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  1. Banks, Jeffrey S & Sobel, Joel, 1987. "Equilibrium Selection in Signaling Games," Econometrica, Econometric Society, vol. 55(3), pages 647-61, May.
  2. Fudenberg, Drew & Tirole, Jean, 1983. "Sequential Bargaining with Incomplete Information," Review of Economic Studies, Wiley Blackwell, vol. 50(2), pages 221-47, April.
  3. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
  4. R. Myerson, 2010. "Refinement of the Nash Equilibrium Concept," Levine's Working Paper Archive 537, David K. Levine.
  5. David Kreps & Paul Milgrom & John Roberts & Bob Wilson, 2010. "Rational Cooperation in the Finitely Repeated Prisoners' Dilemma," Levine's Working Paper Archive 239, David K. Levine.
  6. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  7. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
  8. Rosenthal, Robert W & Weiss, Andrew, 1984. "Mixed-Strategy Equilibrium in a Market with Asymmetric Information," Review of Economic Studies, Wiley Blackwell, vol. 51(2), pages 333-42, April.
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