What is "screening" in the context of private information?

In the context of private information, screening refers to the process of using observable information about individuals to make inferences or assumptions about their unobservable characteristics or private information. For example, in a job market situation, employers often use education levels, previous job experience, or even certain tests to infer the potential productivity or skill level of candidates. This process is crucial in situations where one party has more information than the other, allowing the informed party to take advantage of this disparity.

The choice reflects a key principle in economics concerning asymmetric information, where parties have different amounts of knowledge that can lead to inefficiencies or mismatched outcomes in markets. Through screening, those with less information can try to reduce the uncertainty they face, which is essential in various contexts, from insurance markets to hiring practices.