On Ratings: A Theory of Non-Strategic Information Transmission

Abstract

Coarse communication is typically believed to reflect strategic communication. We show that coarseness can also arise when messaging is non-strategic because, while coarse messages are less precise, they are easier to interpret. This implication is consistent with the use of coarse ratings in a wide variety of settings in which strategic concerns may not be first-order, such as debt and stock analyst reports, employee evaluations, referee recommendations, student grades, and Yelp ratings. The theory provides predictions for the distribution of ratings that we see in practice that match stylized facts in a variety of settings.

Note: This paper combines material from two prior papers: The Shape of Cooperative Communication and Clarifying by Discretizing.

Keywords: Cheap Talk, Discrete, Coarse, Yelp, Credit Ratings, Stock Analysts

JEL Classification: D83, G00, M00