Certifying Firms
38 Pages Posted: 2 May 2019 Last revised: 27 Apr 2022
Date Written: April 1, 2019
Abstract
A competent firm serves a sequence of consumers who are unsure of its competence and effort to supply quality. Certification provides this firm with commitment power for quality provision. I characterize market conditions given which certification can provide this commitment power, and construct one such certification rating system and elucidates its properties. This system discloses the firm’s competence upon sufficiently many consecutive good quality outcomes; otherwise, it shuts down all information. My results identify a novel tension between providing informative ratings and motivating effort to supply quality, and offer a perspective against common concerns regarding the value of certification.
Keywords: certification, adverse selection, dynamic moral hazard
JEL Classification: C72, C73, D82, D83, M52, G24
Suggested Citation: Suggested Citation