Screening of possibly incompetent agents

- We study a screening model where the principal and agents have different prior beliefs about ability.
- Contrary to prior results, low performance sensitivity is used to screen for talent.
- Belief arbitrage makes less talented but extremely confident agents relatively more attractive.
- Welfare analysis is interesting and complicated due to differences in prior beliefs.

Accepting a contract with a high performance sensitivity is normally interpreted as a signal of high ability. However, a high self-assessment may be an incompetent forecast by an incompetent worker. In a model where optimistic agents have low ability, a low performance sensitivity screens out the incompetent agents. However, when agents are wealthy enough, the principal prefers to select the incompetent agent who covers the downside (as in a vanity press).