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Information Design with Costly State Verifi cation

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  • Lily Ling Yang

Abstract

We study a persuasion problem when the receiver has the ability to probabilistically verify the state at a cost. The sender wants to convince the receiver to accept a project but the receiver is only willing to accept the project when the quality is above a threshold. The optimal disclosure policy balances between influencing the receiver's decisions to accept and to verify the quality. The optimal disclosure is deterministic and involves at most three messages, each consisting of an action recommendation and a verification recommendation. In the optimal disclosure, the action recommendation has a cutoff structure while the verification recommendation has a negative assortative structure. Specifically, the optimal disclosure recommends acceptance when the quality is above a threshold. When the quality is below this threshold, rejection without verification is recommended. Above this threshold, verification is not recommended when the quality lies in the middle range of the interval. The optimal disclosure reveals more information compared to the case where verification is exogenous.

Suggested Citation

  • Lily Ling Yang, 2024. "Information Design with Costly State Verifi cation," CRC TR 224 Discussion Paper Series crctr224_2024_502, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2024_502
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp502
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    References listed on IDEAS

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    More about this item

    Keywords

    Bayesian persuasion; Information design; Costly information acquisition; Costly state veri cation; Product recommendation;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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