Screening Dominance: A Comparison of Noisy Signals

Abstract

This paper studies the impact of noisy signals on screening processes. It deals with a decision problem in which a decision-maker screens a set of elements based on noisy unbiased evaluations. Given that the decision-maker uses threshold strategies, we show that additional binary noise can potentially improve a screening, an effect that resembles a “ lucky coin toss.” We compare different noisy signals under threshold strategies and optimal ones, and we provide several characterizations of cases in which one noise is preferable over another. Accordingly so, we establish a novel method to compare noise variables using a contraction mapping between percentiles. (JEL D82)