Conveying Value Via Categories
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 monotonic categorization of quality. We characterize the sender’s optimal monotonic categorization. Using our characterization, we study the optimality of full pooling or full separation, the alternation of pooling and separation, and make precise a sense in which pooling is dominant relative to separation. We discuss applications, extensions and generalizations, among them the design of a grading scheme by a profit-maximizing school which seeks to signal student qualities and simultaneously incentivize students to learn. Such incentive constraints force monotonicity, and can also be embedded as a distortion of the school’s prior over student qualities, generating a categorization problem with distinct sender and receiver priors.

Link to paper: paonuchic.github.io/OnuchicJM/OnuchicRay2020.pdf

Please sign up for meetings here: docs.google.com/spreadsheets/d/1G0KdCfEkG4LYBuDSCLxyGRSEULv3_smLEEQMofG4X5U/edit#gid=0
Date: 6 November 2020, 14:15 (Friday, 4th week, Michaelmas 2020)
Venue: Held on Zoom
Speaker: Paula Onuchic (New York University)
Organising department: Department of Economics
Part of: Nuffield Economic Theory Seminar
Booking required?: Not required
Audience: Members of the University only
Editor: Melis Clark