Certification Disclosure and Informational Efficiency: A Case for Ordered Ranking of Levels

U of Oxford, Economics Discussion Paper No. 64

36 Pages Posted: 14 Aug 2002

See all articles by Gerardo A. Guerra

Gerardo A. Guerra

University of Oxford - Department of Economics

Date Written: January 2001

Abstract

This paper shows that a monopolistic certifying party can have incentives to disclose revealing information about the agent he is certifying. Using a three-person game-theoretic model and allowing certificate users (buyers) to have noisy estimates of the quality level of the agent being certified (seller), a disclosure in the form of ordered ranking of levels is predicted. This contrasts with previous results in certification theory stating that monopolistic certifiers disclose a minimum amount of information (with no informational value) about the party being certified, in order to extract all informational rents from the market. The predicted disclosure is consistent with real life observations of certification disclosure as found in debt ratings (notches) and hotels listings (using a discrete system of stars). The model is robust enough to explain the results of previous models. The paper also adds to the existing literature an evaluation of four different strategies of information disclosure that are available to a certifier.

Keywords: Certification, asymmetric information, disclosure, credit ratings

JEL Classification: C72, D18, D82, L15, L86

Suggested Citation

Guerra, Gerardo A., Certification Disclosure and Informational Efficiency: A Case for Ordered Ranking of Levels (January 2001). U of Oxford, Economics Discussion Paper No. 64. Available at SSRN: https://ssrn.com/abstract=320022 or http://dx.doi.org/10.2139/ssrn.320022

Gerardo A. Guerra (Contact Author)

University of Oxford - Department of Economics ( email )

BREB Unit
Manor Road Building, Manor Road
Oxford OX1 3UQ
United Kingdom

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