One way to address the issues brought on by asymmetric knowledge, including moral hazard and

adverse selection, is by screening. Screenings can be used to improve the flow of information when
asymmetric information results in inefficiency because one side of a market has less information than
the other. Those with less knowledge employ a number of techniques to separate the better from the
worst. Aptitude exams, grade point averages, school ties, historical data, and demographic traits are
typical screening tools.

The labor market and the provision of insurance are two marketplaces that frequently use screening.
The quality of workers recruited by companies in the labor market may be limited by adverse selection,
and moral hazard makes the insurance industry less efficient. Low-information employers frequently use
aptitude tests, grade point averages, and school ties to vet candidates. Low-information insurance
carriers frequently check consumers' ancestry and demographics. In both situations, people with less
knowledge imply more complete information using sparse but easily obtainable information.

Screening is sometimes a good, but not ideal, technique to deal with asymmetric information.
Unfortunately, screening might allow low-quality products to enter the high-quality group (in the case of
advertisement selection) because it is by its very nature based on limited information, and it does not
necessarily need to imply a change in behavior (in the case of moral hazard). Screening is ineffective if it
cannot provide reliable information.

A related strategy for dealing with the issues of asymmetric information is signaling. Signaling is created
when this information is combined with signs to distinguish between different product qualities. People
with less information utilize screening, whereas people with more knowledge use signaling.

Asymmetric Information

Because not everyone has access to information equally, there is asymmetric information. There will
always be those people who know more than others. Particularly, the availability of information to
buyers and sellers in a market is likely to be imbalanced or asymmetrical. Sellers who are in control of a
good frequently have more knowledge than buyers.

When asymmetric information causes moral hazard and unfavorable selection, screening is performed.

1) Adverse selection is a significant result of asymmetric information that occurs when the quality
of the items being exchanged is limited by a lack of knowledge. Buyers are more likely to offer a
lower price because they have less precise knowledge about the quality of the goods, which
deters sellers from providing higher-quality goods. In labor markets with unfavorable selection,
screening is used.
2) Asymmetric knowledge can also result in moral hazard, which happens when one person makes
a choice that negatively affects another. The best illustration is seen with insurance, when the
insured person engages in risky conduct knowing that the insurance company is not aware of
the insured person's risky actions. The insurance company might be informed of the behavior
change through screening.
More information is needed in order to address moral hazard and adverse selection. Unfortunately,
some people lack knowledge since a good search balance between the advantages and
disadvantages doesn't warrant more. This is addressed by screening by offering inexpensive
information. Despite not being as accurate or comprehensive, the information is superior.

common methods of screening: labor

The issues caused by asymmetric information can be solved using a wide range of screening
procedures. A brief list utilized in the job market comes first, then a list used in insurance provision.

1) Aptitude tests: Scores on standardized or specialized tests taken by prospective employees

are frequently used by employers to separate higher-quality individuals from lower-quality
ones. These test results apparently reflect employee productivity.
2) Grade Point Average (GPA): Much to aptitude exams, GPAs obtained over years of schooling
are used to separate potential employees. Grade point represents performance across
several years as opposed to a single test.
3) connections with a school: Employers use a student's school's reputation as a screening tool.
Presumably, students and employees from better schools are also better students and
workers.
4) Extracurricular activities are another kind of screening that are unrelated to the courses
being taken. People who engage in and excel at these activities are frequently assumed to
have desirable job skills.

Common screening techniques: insurance: