103 Pages Posted: 13 Apr 2016 Last revised: 21 May 2016
Date Written: April 9, 2016
Rating systems not only provide information to users but also motivate the rated agent. This paper solves for the optimal (effort-maximizing) rating system within the standard career concerns framework. It is a mixture two-state rating system. That is, it is the sum of two Markov processes, with one that reflects the belief of the rater and the other the preferences of the rated agent. The rating, however, is not a Markov process. Our analysis shows how the rating combines information of different types and vintages. In particular, an increase in effort may affect some (but not all) future ratings adversely.
Keywords: Career Concerns, Mechanism Design, Ratings
JEL Classification: C72, C73
Suggested Citation: Suggested Citation