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Conveying value via categories

Author

Listed:
  • Onuchic, Paula

    (Nuffield College, University of Oxford)

  • Ray, Debraj

    (Department of Economics, NYU and University of Warwick)

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 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.

Suggested Citation

  • Onuchic, Paula & Ray, Debraj, 2023. "Conveying value via categories," Theoretical Economics, Econometric Society, vol. 18(4), November.
    • Handle: RePEc:the:publsh:5026
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    References listed on IDEAS

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    More about this item

    Keywords

    Monotonic categorization; heterogeneous priors; information design;
    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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