The Theory of Screening, Education, and the Distribution of Income

Stiglitz, Joseph E.

One of the most important kinds of information concerns the qualities of a factor or a commodity. One knows that there are important differences among individuals, among bonds, among equities, and among brands of automobiles. The identification of these qualities one call screening, and devices that sort the commodities according to their qualities are call, screening devices. This paper focuses on the labeling of individuals, on the economic costs and benefits of labeling, the institutions that provide it, and the determination of the equilibrium amount of screening under various institutional arrangements. The educational sector provides an important point of comparison between the two allocation processes. If, education provides information as well as skills, then it is providing a "commodity" for which it is well known that the market "fails"; author has shown how social returns differ from private returns and have examined in detail the market allocation of resources to education as well as the structure of the educational system which would emerge from a simplified political process in a highly idealized setting.



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American Economic Review

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May 2, 2013