Who Should Pay for Certification?

38 Pages Posted: 6 Mar 2011

See all articles by Konrad O. Stahl

Konrad O. Stahl

University of Mannheim - Department of Economics; Centre for Economic Policy Research (CEPR)

Roland Strausz

Humboldt University of Berlin - School of Business and Economics; Centre for Economic Policy Research (CEPR)

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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

Stahl, Konrad O. and Strausz, Roland, Who Should Pay for Certification? (February 28, 2011). CESifo Working Paper Series No. 3365, Available at SSRN: https://ssrn.com/abstract=1775791 or http://dx.doi.org/10.2139/ssrn.1775791

Konrad O. Stahl (Contact Author)

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany
+49 621 181 1875 (Phone)
+49 621 181 1874 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Roland Strausz

Humboldt University of Berlin - School of Business and Economics ( email )

Spandauer Str. 1
Berlin, D-10099
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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