Dynamic Certification and Reputation for Quality
60 Pages Posted: 25 Jan 2017
Date Written: January 13, 2017
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: Suggested Citation