Information Design with Costly State Verifi cation

Lily Ling Yang (lily.yang@uni-mannheim.de)

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: We study a persuasion problem when the receiver has the ability to probabilistically verify the state at a cost. The sender wants to convince the receiver to accept a project but the receiver is only willing to accept the project when the quality is above a threshold. The optimal disclosure policy balances between influencing the receiver's decisions to accept and to verify the quality. The optimal disclosure is deterministic and involves at most three messages, each consisting of an action recommendation and a verification recommendation. In the optimal disclosure, the action recommendation has a cutoff structure while the verification recommendation has a negative assortative structure. Specifically, the optimal disclosure recommends acceptance when the quality is above a threshold. When the quality is below this threshold, rejection without verification is recommended. Above this threshold, verification is not recommended when the quality lies in the middle range of the interval. The optimal disclosure reveals more information compared to the case where verification is exogenous.

Keywords: Bayesian persuasion; Information design; Costly information acquisition; Costly state veri cation; Product recommendation (search for similar items in EconPapers)
JEL-codes: D82 D83 (search for similar items in EconPapers)
Pages: 48
Date: 2024-02
New Economics Papers: this item is included in nep-des, nep-gth and nep-mic
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