Does Costly Persuasion Signal Quality?
32 Pages Posted: 16 Nov 2020
Date Written: September 9, 2020
This article investigates how a privately-informed seller could signal her type by gathering information about the buyer's match value. We study two alternative ways to obtain information. In the first one, labeled information acquisition, the seller can acquire exogenous signals by facing a fixed acquisition cost. In the second one, on top of the fixed cost, the seller faces an additional designing cost based on mutual information to endogenously reduce uncertainty on the match value (information design). At first glance, bearing such cost may seem not convenient for the seller. However, we show that when the designing cost is relatively high, the parameter region in which separation can occur is larger under information design. When this cost is low, the separation cannot emerge under information design. The non-monotone relationship between the designing cost and separating outcomes shows that a seller's ability to provide match information is not necessarily associated with more precise quality information.
Keywords: persuasion, signaling, match value, information design, unknown quality
JEL Classification: D82, D83, L11
Suggested Citation: Suggested Citation