Sizing Up Categories
Abstract
Categories intentionally create discontinuities. By breaking the world
up into cognizable chunks, they simplify the information environment.
But the signals they provide may be inaccurate or scrambled by
strategic behavior. This Article considers how law might approach
the problem of optimal categorization, given the role of categories
in managing and transmitting information. It proceeds from the
observation that high categorization costs can be addressed through
two opposite strategies—making classifications more fine-grained
(splitting), and making classifications more encompassing (lumping).
Although continuizing and other forms of splitting offer intuitive
answers to inaccurate classification and gaming along category
lines, lumping is sometimes a better solution. If category membership
carries multiple and offsetting implications, the incentive to manipulate
the classification system is dampened. To take a simple example,
insurance that covers only one risk is more vulnerable to adverse
selection than is an insurance arrangement that covers two inversely
correlated risks. Making categories larger, more durable, and more
heterogeneous can produce such offsets. These and other forms of
bundling can arrest damaging instabilities in categorization.
up into cognizable chunks, they simplify the information environment.
But the signals they provide may be inaccurate or scrambled by
strategic behavior. This Article considers how law might approach
the problem of optimal categorization, given the role of categories
in managing and transmitting information. It proceeds from the
observation that high categorization costs can be addressed through
two opposite strategies—making classifications more fine-grained
(splitting), and making classifications more encompassing (lumping).
Although continuizing and other forms of splitting offer intuitive
answers to inaccurate classification and gaming along category
lines, lumping is sometimes a better solution. If category membership
carries multiple and offsetting implications, the incentive to manipulate
the classification system is dampened. To take a simple example,
insurance that covers only one risk is more vulnerable to adverse
selection than is an insurance arrangement that covers two inversely
correlated risks. Making categories larger, more durable, and more
heterogeneous can produce such offsets. These and other forms of
bundling can arrest damaging instabilities in categorization.