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).