In order to test the notion that saturation of auditory‐nerve fibers limits psychophysical performance in intensity discrimination at high stimulus levels, intensity difference limens (DL) of single auditory‐nerve fibers in anesthetized cats were measured for tones at the CF, using stimulus paradigms and detectability measures similar to those of psychophysics. The physiological DL reaches a minimum in the range of stimulus levels where discharge rate increases rapidly. In a narrow range of levels around the minimum, single‐fiber DLs approach psychophysical DLs. An optimum‐processor model that combines intensity information from an array of 30 000 auditory‐nerve fibers with a realistic threshold distribution predicts intensity DLs that are well below psychophysical DLs over a 90‐dB range of levels. This result implies that psychophysical performance is not limited by saturation in auditory‐nerve fibers, but by central factors. Suboptimal processors that give more weight to intensity information from high‐threshold fibers than to information from low‐threshold fibers can closely predict psychophysical DLs for both tones and broadband noise over a wide range of stimulus levels. Moreover, such processing schemes, which are based on average discharge rates, provide a stable representation of the spectra of speech sounds with respect to variations in intensity. [Work supported by NIH.]