Screening
Screening is the use of devices, such as contracts or tests, to draw out private information from a better-informed party.
If you cannot tell who you are dealing with, you can design a test that makes them reveal it. That is screening, the mirror image of signalling.
Screening is the use of devices, such as contracts, menus, or tests, by an uninformed party to induce a better-informed party to reveal their private information. Where signalling is initiated by the party who holds the information, screening is initiated by the party who lacks it, designing the interaction so that different types sort themselves.
Making people reveal themselves
The screening party cannot directly observe what they need to know, the risk a customer poses, the quality of a worker, the type of a borrower, so they construct choices that different types will respond to differently, causing each to reveal itself through its choice. An insurer cannot see who is high-risk, but by offering a menu of policies, high cover with high premiums, or low cover with low premiums, it leads cautious low-risk customers to pick one and high-risk customers the other, sorting them by their own decisions.
Designing the menu
The art of screening is constructing options so that it is in each type's own interest to choose the one designed for it, revealing their type in the process. Insurers use deductibles and tiered policies; lenders use collateral requirements and interest rates; employers use probation periods and performance-based pay. Each is a mechanism that gets the informed party to disclose, through their choice, what they would not disclose through their words.
Why it matters
Screening is a central response to the problems that asymmetric information creates, especially adverse selection, where the uninformed party risks attracting the worst types. Without screening, markets for insurance, credit, and labour can unravel, as the inability to tell good from bad drives out the good. By sorting types, screening keeps such markets functioning, though often at a cost: the distortions of the screening devices themselves, such as people taking less insurance than they would like in order to prove they are low-risk.
Screening and signalling are the two great responses to private information, approached from opposite sides. Together they explain a vast amount of how contracts, products, and institutions are designed, all of it machinery for coping with the basic problem that, in most dealings, one party knows things the other would dearly like to.