Comment on the use of screening and signalling in situations characterised by asymmetric information. Construct your own unique example, distinct from examples in lectures and the textbook, to explain what is meant by ‘separation of types based on self-selection’ and the ‘pooling of types’. Your example must clearly illustrate the use of a screening/signalling device and the associated incentive compatibility or participation constraints. Also comment on the nature of costs involved in the presence of information asymmetry.

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Signaling is an action by a party with good information that is confined to situations of asymmetric ... View the full answer