Conveying value via categories

Journal article

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.

Authors: Onuchic, P; Ray, D

• Publication status: Published
• Peer review status: Peer reviewed
• Publisher: Econometric Society
• Journal: Theoretical Economics
• Volume: 18
• Issue: 4
• Pages: 1407–1439
• Publication date: 2023-11-09
• Acceptance date: 2022-12-14
• DOI: 10.3982/TE5026
• EISSN: 1555-7561
• ISSN: 1933-6837
• Language: English
• Keywords: heterogeneous priors; monotonic categorization; information design