Screening and signaling

Screening and signaling are strategies used to address information gaps in situations like hiring or lending. Screening involves the informed party (e.g., an employer) designing tests or assessments to differentiate between potential candidates or applicants based on their qualities or reliability. Signaling involves the less-informed party (e.g., job seekers or borrowers) taking actions or sharing information (like certifications or credit history) to demonstrate their value or trustworthiness. Together, these processes help reduce uncertainty, enabling better decision-making by highlighting genuine qualities and distinguishing between high- and low-quality individuals or options.