Screening

Screening is the mechanism-design approach to separating unobservable consumer (or agent) types by offering a menu of contracts each type self-selects into. It is the demand-side mirror of Signaling: in signaling, the informed party takes a costly action to reveal type; in screening, the uninformed party designs a contract menu that forces revelation. In Topic 2 this appears under Second-Degree Price Discrimination; in Topic 1 it appears in the insurance example, where the insurer offers a full-coverage policy at a high premium and a partial-coverage policy at a low premium so that low-risk and high-risk individuals self-separate.

When to use

Use the screening lens whenever a firm or principal cannot observe an agent's private type but knows the type distribution. The contract menu must respect Incentive Compatibility (each type prefers its own contract) and individual rationality (each type weakly prefers participation to outside option). The unavoidable cost of unobservability is the Information Rent paid to the high type — a direct welfare loss relative to first-best.