Question

b) Discuss signaling and screening mechanisms used in the following markets: i. Labor market ii. Product market iii. Credit market

Answer 1

Ans ib)

In labor market Signaling is a process by which potential employees send information about their ability to the employer by acquiring education credentials. Though this the employer sorts the high ability candidates against the low ability candidates.

The various screening mechanisms used in the Labor market are:

1. Degrees.

Employers use degrees to shortlist the candidates. As they assume top colleges and universities produce high quality candidates.

2. Aptitude Test.

Emploers use aptitude test to select high quality candidates from a poll of job seekers. It is usually in the form of specialised tests that are used to test a candidates productivity and knowledge of specific subjects.

Ans ii b)

Screening is a process by which the company evaluates whether to devote further resources to the next development stage of a product . As product development is a very expensive that is why it is evaluated at every stage before its commercialisation.

The various screening mechanisms used in the Product market are

1. Simple Checklist.

In simple checklist technique products are rated on a scale ranging from poor to good in respect of factors such as value added, sales volume, and effect on present products.

2. Concept testing.

In concept testing technique the consumer responses regarding the product are evaluated before introducing it to the market.

Ans iii b)

In credit market Signaling is a process by which the borrower gives the information about his credibility to the lender.

The various screening mechanisms used in the credit market are:

1. Capacity.

The lenders capacity is evaluated based on company's past cash flow statements to determine how income is expected from the operations. It is then compared with the obilgations he has.

2. Character.

The lenders character is evaluated based on his market reputation regarding his paying capacity through the help of credit repoting agencies.