Who Should Pay for Certification?

41 Pages Posted: 12 Aug 2011  

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; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 3 versions of this paper

Date Written: June 16, 2010

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: D40, D82, L14, L15

Suggested Citation

Stahl, Konrad O. and Strausz, Roland, Who Should Pay for Certification? (June 16, 2010). ZEW - Centre for European Economic Research Discussion Paper No. 11-054. Available at SSRN: https://ssrn.com/abstract=1908766 or http://dx.doi.org/10.2139/ssrn.1908766

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)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Roland Strausz

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

Spandauer Str. 1
Berlin, D-10099
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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