Firm Certification

44 Pages Posted: 2 May 2019 Last revised: 19 Apr 2021

Date Written: April 1, 2019

Abstract

I study the design of dynamic certification schemes for a firm who privately knows her competence and efforts towards quality provisions. I show that the following scheme maximizes the certifier's revenue and induces efficient efforts. The scheme uses a honors status to motivate quality provisions over time, in that a competent firm is either "certified" or "certified with honors." The scheme has a low standard, in that an inept firm is always "certified." Remarkably, when effort is more costly, the scheme makes the honors status more difficult to achieve. I relate my findings to concerns about certification in practice.

Keywords: certification, adverse selection, dynamic moral hazard

JEL Classification: C72, C73, D82, D83, M52, G24

Suggested Citation

Vong, Allen, Firm Certification (April 1, 2019). Available at SSRN: https://ssrn.com/abstract=3363690 or http://dx.doi.org/10.2139/ssrn.3363690

Allen Vong (Contact Author)

Yale University ( email )

New Haven, CT 06520
United States

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