Conveying value via categories

Onuchic, Paula ORCID: 0009-0007-1818-5356 and Ray, Debraj (2023) Conveying value via categories. Theoretical Economics, 18 (4). pp. 1407-1439. ISSN 1933-6837

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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.

Item Type:	Article
Additional Information:	© 2023 The Author(s)
Divisions:	LSE
Subjects:	H Social Sciences > HB Economic Theory
Date Deposited:	08 Oct 2024 11:18
Last Modified:	17 Oct 2024 18:20
URI:	http://eprints.lse.ac.uk/id/eprint/125653

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