(Improving) Muddled Information
Alex Frankel (Chicago Booth)
We first study a model of signaling in which agents are heterogeneous on two dimensions. An agent’s natural action is the action taken in the absence of signaling concerns; in the context of school testing, think of a student's underlying grasp of the material. Her gaming ability parameterizes the cost of increasing the action; think of skill at test prep. Equilibrium behavior muddles information across dimensions. As incentives to take higher actions increase—due to higher stakes or more manipulable signaling technology—more information is revealed about gaming ability, and less about natural actions. We then discuss how information about natural actions can be improved, either through "leveling the playing field" or by committing to "flatten" the allocation rule as a function of the action.
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