Dynamic Certification and Reputation for Quality

60 Pages Posted: 25 Jan 2017

See all articles by Ivan Marinovic

Ivan Marinovic

Graduate School of Business, Stanford University

Andrzej Skrzypacz

Stanford University - Stanford Graduate School of Business

Felipe Varas

Duke University - Fuqua School of Business - Finance Department

Date Written: January 13, 2017

Abstract

We study a firm’s incentives to build and maintain reputation for quality, when quality is persistent and can be certified at a cost. We characterize all Markov-perfect equilibria where the firm’s choices -i.e., timing of certification and investment– depend only on the firm’s reputation. MPE vary in frequency of certification and payoffs, but are generally characterized by low payoffs and over-certification traps. We contrast the MPEs with the highest-payoff PBE equilibria. We interpret that industry certification standards help firms coordinate on more efficient equilibria. The optimal standard al- lows firms to maintain high quality forever, once it is reached for the first time, and it can be either lenient or harsh - endowing firms with multiple or one chance to improve and certify quality.

Keywords: Dynamic Certification, Disclosure, Investment trap, Voluntary Disclosure, Certification, Dynamic Games, Optimal Stopping

JEL Classification: C73, D82, D83, D84

Suggested Citation

Marinovic, Ivan and Skrzypacz, Andrzej and Varas, Felipe, Dynamic Certification and Reputation for Quality (January 13, 2017). Available at SSRN: https://ssrn.com/abstract=2839587 or http://dx.doi.org/10.2139/ssrn.2839587

Ivan Marinovic (Contact Author)

Graduate School of Business, Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Andrzej Skrzypacz

Stanford University - Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-736-0987 (Phone)
650-725-9932 (Fax)

Felipe Varas

Duke University - Fuqua School of Business - Finance Department ( email )

Durham, NC 27708-0120
United States

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