Conveying value via categories

Paula Onuchic and Debraj Ray

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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 that 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: heterogeneous priors; information design; Monotonic categorization (search for similar items in EconPapers)
JEL-codes: D82 D83 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2023-11-30
New Economics Papers: this item is included in nep-des and nep-mic
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Published in Theoretical Economics, 30, November, 2023, 18(4), pp. 1407-1439. ISSN: 1933-6837

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http://eprints.lse.ac.uk/125653/ Open access version. (application/pdf)

Related works:
Journal Article: Conveying value via categories (2023)
Working Paper: Conveying Value via Categories (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:125653

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