Incentivizing Agents through Ratings

Peiran Xiao

Papers from arXiv.org

Abstract: I study the optimal design of ratings to motivate agent investment in quality when transfers are unavailable. The principal designs a rating scheme that maps the agent's quality to a (possibly stochastic) score. The agent has private information about his ability, which determines his cost of investment, and chooses the quality level. The market observes the score and offers a wage equal to the agent's expected quality. For example, a school incentivizes learning through a grading policy that discloses the student's quality to the job market. I reduce the principal's problem to the design of an interim wage function of quality. When restricted to deterministic ratings, I provide necessary and sufficient conditions for the optimality of simple pass/fail tests and lower censorship. In particular, when the principal's objective is expected quality, pass/fail tests are optimal if agents' abilities are concentrated towards the top of the distribution, while pass/lower censorship is optimal if abilities are concentrated towards the mode. The results generalize existing results in optimal delegation with voluntary participation, as pass/fail tests (lower censorship) correspond to take-it-or-leave-it offers (threshold delegation). Additionally, I provide sufficient conditions for deterministic ratings to remain optimal when stochastic ratings are allowed. For quality maximization, pass/fail tests remain optimal if the ability distribution becomes increasingly more concentrated towards the top.

Date: 2024-07, Revised 2024-11
New Economics Papers: this item is included in nep-cta, nep-des and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2407.10525 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2407.10525

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators (help@arxiv.org).