Screening, Signaling and
Voluntary Disclosure
Screening and Signaling
 Definitions:
Screening- An attempt by an uninformed
party to sort individuals according to their
characteristics.
Signaling- An attempt by an informed
party to send an observable indicator of
his or her hidden characteristics to an
uniformed party.
Examples of Screening
1.
2.
3.
4.
Screening to enable price
discrimination (coupons, rebates,
outlet malls,…)
Screening to sort different types of
workers.
Choice of deductibles associated
with different types of insurance.
Obtaining a physical to obtain a
favorable life insurance policy.
Examples of Signaling
1.
2.
3.
Obtaining an advanced degree
such as an MBA or PhD.
Seller offering a warranty.
Labor contract negotiations/
Negotiating a compensation
package.
Example 1: Signaling with a Warranty

Suppose there are sellers of lemons
and sellers of peaches and buyers
cannot tell a lemon from a peach (like
the adverse selection example we did).
Suppose a seller can obtain a price of
$2,000 if he has a lemon and the buyer
knows it’s a lemon and a price of $3,000
if he has a peach and the buyer knows
it’s a peach. Finally, assume all sellers
can credibly offer a warranty.
Example 1: Signaling with a Warranty

Let the probability of a lemon breaking
down be .70 and the probability of a
peach breaking down be .10. Suppose
the warranty states that if the car breaks
down, the seller will pay the buyer
$1,500 to repair the car.
Example 1: Signaling with a Warranty

Will the seller with a lemon offer the warranty?
Marginal Benefit (MB) from offering the warranty is $1,000.
Marginal Cost (MC) from offering the warranty is .7*1500=$1,050.

Will the seller with a peach offer the warranty?
Marginal Benefit (MB) from offering the warranty is $1,000.
Marginal Cost (MC) from offering the warranty is .1*1500=$150.
MB<MC for seller with lemon and MB>MC for seller with peach.
Therefore, seller with peach can credibly signal to buyer that
the car is a peach by offering the above warranty.
Example 2: Signaling in National
Football League Contract Negotiations
Guaranteed
 Representative Contract
Non-Guaranteed
Year
1991
Signing
Base
Reporting
Bonus
Salary
Bonus
$250,000 $150,000
1992
$170,000
1993
$190,000
$20,000
Signaling in NFL Negotiations
Review of Economic and Statistics (2003)
Michael Conlin and Patrick Emerson
Proportion that “Make Team” and
Mean Number of Starts
Proportion that “Make Team” and
Mean Number of Starts
Voluntary Disclosure
Not Covered in Textbook
You’re on a job interview and the interviewer
knows what the distribution of GPAs are for
MBA students at MSU:
Percent
.20
.30
.30
.20
GPA
2.5
3.0
3.5
4.0
Expected/Average grade for everyone:
.2*2.5+.3*3.0+.3*3.5+.2*4.0 = 3.25
Geoff Humphrys at the Lear Center advises anyone who has
a 3.5 GPA or higher to volunteer their GPA. Is this a stable
outcome?
Percent
.20
.30
.30
.20
GPA
2.5
3.0
3.5
4.0




Students remaining
Original share
What does the potential
Percent
employer believe about
.3/.5
.2/.5
the people who stay quiet?
They know their GPA is
=.4
=.6
below a 3.5, but how far
below?
GPA
2.5
3.0
Guess the average grade
of everyone who didn’t
get at least a 3.5.
What is that? .4*2.5 + .6*3.0 = 2.8
People with 3.0s will reveal themselves because they
don’t want employer to assume they have a 2.8
Voluntary disclosure
Full disclosure principle - if some
individuals stand to benefits by revealing a
favorable trait, others will be forced to
disclose their less favorable values.
 If disclosure is costless, only the lowest
types will not reveal their quality

Voluntary Disclosure and Signaling

Voluntary Disclosure differs from Signaling
because we are assuming that the cost of
lying (i.e., saying you have a GPA of 4.0
when you have a GPA of 3.5) is so large
than no one does it. Therefore, the
decision is to either reveal your private
information truthfully or don’t reveal.
Voluntary Disclosure

If it is true that only the lowest types don’t
reveal and that consumers/employers (the
uninformed party) can infer they are the
lowest type, then government should not
have to intervene in the market – for
example, they should not require firms
producing salad dressings to report the fat
content and they should not require
restaurants to report their hygiene score.
Fat content in Salad Dressing
The Impact of Mandatory Disclosure Laws On Product Choice
Alan Mathios
http://www.jstor.org/view/00222186/ap020088/02a00130/0
Hygiene Scores for LA Restaurants
The Effect of Information on Product Quality
By Phil Leslie and Ginger Jin
http://www.mitpressjournals.org/doi/pdfplus/10.1162/003355303321675428?cookieSet=1
Shipping Charges in Online Auction Platforms
Shrouded Attributes and Information Suppression:
Evidence from the Field
(e-Bay and on-line auction platforms in Taiwan and Ireland)
By Jennifer Brown, Tanjim Hossain and John Morgan (QJE 2010)
Film Studios Withholding Movies from Critics
To Review or Not to Review? Limited Strategic
Thinking at the Movie Box Office
By Alexander Brown, Colin Camerer and Dan Lovallo (AEJ: Micro 2012)
Inference of SAT score in College Admissions
By Michael Conlin and Stacy Dickert-Conlin
Why would Colleges go to Optional
SAT Policy?

•

•
•
Attract a different type of student (those that
don’t test well but do well in college)
Maybe more diverse?
Improve ratings
Average SAT score included in U.S. News and
World Report
If don’t have SAT scores for lowest score
students, reported average increases.
U.S. News and World Report
Criteria
Weight
Subcriteria
Weight
Student Selectivity
15%
SAT/Act scores
Acceptance Rate
Yield
High school class standing top
10%
40 %
15%
10%
35%
Academic reputation (survey of 25%
other colleges)
Faculty resources
20%
Graduation and retention rate
20%
Financial resources
(expenditure per student)
10%
Alumni giving (rate)
5%
Graduation rate performance
5%
Strategic Behavior of Colleges
By Michael Conlin, Stacy Dickert-Conlin and Gabrielle Chapman
Journal of Economic Behavior and Organizations (2013)