Conveying value via categories

Paula Onuchic, Debraj Ray

    Research output: Contribution to journalArticlepeer-review

    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.

    Original languageEnglish (US)
    Pages (from-to)1407-1439
    Number of pages33
    JournalTheoretical Economics
    Volume18
    Issue number4
    DOIs
    StatePublished - Nov 2023

    Keywords

    • D82
    • D83
    • heterogeneous priors
    • information design
    • Monotonic categorization

    ASJC Scopus subject areas

    • Economics, Econometrics and Finance(all)

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