Who Should Pay for Certification?
38 Pages Posted: 6 Mar 2011
There are 3 versions of this paper
Who Should Pay for Certification?
Who Should Pay for Certification?
Who Should Pay for Certification?
Date Written: February 28, 2011
Abstract
Who does, and who should initiate costly certification by a third party under asymmetric quality information, the buyer or the seller? Our answer - the seller - follows from a nontrivial analysis revealing a clear intuition. Buyer-induced certification acts as an inspection device, seller-induced certification as a signalling device. Seller-induced certification maximizes the certifier’s profit and social welfare. This suggests the general principle that certification is, and should be induced by the better informed party. The results are reflected in a case study from the automotive industry, but apply also to other markets - in particular the financial market.
Keywords: asymmetric information, certification, information acquisition, inspection, lemons, middlemen, signaling
JEL Classification: D400, D820, L140, L150
Suggested Citation: Suggested Citation
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