Conveying value via categories

Paula Onuchic () and Debraj Ray
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Paula Onuchic: Nuffield College, University of Oxford

Theoretical Economics, 2023, vol. 18, issue 4

Abstract: A sender sells an object of unknown quality to a receiver who pays his expected value for it. Sender and receiver might hold different priors over quality. The sender commits to a monotone categorization of quality. We characterize the sender's optimal monotone categorization, the optimality of full pooling or full separation, and make precise a sense in which pooling is dominant relative to separation. As an application, we study the design of a grading scheme by an educational institution which seeks to signal student qualities and simultaneously incentivize students to learn. We show how these incentive constraints are embedded as a distortion of the school's prior over student qualities, generating a monotone categorization problem with distinct sender and receiver priors.

Keywords: Monotonic categorization; heterogeneous priors; information design (search for similar items in EconPapers)
JEL-codes: D82 D83 (search for similar items in EconPapers)
Date: 2023-11-09
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Working Paper: Conveying value via categories (2023)
Working Paper: Conveying Value via Categories (2021)
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