On Ratings: A Theory of Non-Strategic Information Transmission

77 Pages Posted: 24 Apr 2017 Last revised: 14 Nov 2019

See all articles by Jordan Martel

Jordan Martel

Indiana University Bloomington - Kelley School of Business

Edward Dickersin Van Wesep

University of Colorado at Boulder - Department of Finance

Robert Van Wesep

Independent

Date Written: January 28, 2019

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

Suggested Citation

Martel, Jordan and Van Wesep, Edward Dickersin and Van Wesep, Robert, On Ratings: A Theory of Non-Strategic Information Transmission (January 28, 2019). Available at SSRN: https://ssrn.com/abstract=2950813 or http://dx.doi.org/10.2139/ssrn.2950813

Jordan Martel

Indiana University Bloomington - Kelley School of Business ( email )

1309 E 10th Street, Hodge Hall 4100
Bloomington, IN 47405
United States

Edward Dickersin Van Wesep (Contact Author)

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States

Robert Van Wesep

Independent ( email )

No Address Available

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