Template-Type: ReDIF-Paper 1.0
Title: Information Design with Costly State Verifi…cation
Author-Name: Lily Ling Yang
Author-Email: lily.yang@uni-mannheim.de
Classification-JEL: D82, D83
Keywords: Bayesian persuasion, Information design, Costly information acquisition, Costly
state veri…cation, Product recommendation

Abstract: We study a persuasion problem when the receiver has the ability to probabilistically verify the state at a cost.
The sender wants to convince the receiver to accept a project but the receiver is only willing to accept the
project when the quality is above a threshold. The optimal disclosure policy balances between influencing the
receiver's decisions to accept and to verify the quality. The optimal disclosure is deterministic and involves at
most three messages, each consisting of an action recommendation and a verification recommendation. In the
optimal disclosure, the action recommendation has a cutoff structure while the verification recommendation
has a negative assortative structure. Specifically, the optimal disclosure recommends acceptance when the
quality is above a threshold. When the quality is below this threshold, rejection without verification is
recommended. Above this threshold, verification is not recommended when the quality lies in the middle range
of the interval. The optimal disclosure reveals more information compared to the case where verification is
exogenous.


Note: 
Length: 48
Creation-Date: 2024-02
Revision-Date:
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp502
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2024_502