Firm Certification

55 Pages Posted: 2 May 2019 Last revised: 7 Nov 2019

Date Written: April 1, 2019

Abstract

This paper studies the design of dynamic, revenue-maximizing certification schemes for firms. Optimal schemes leverage adverse selection to alleviate moral hazard. They admit a coarse and opaque structure, transferring positive information rents from competent firms to inept firms. Importantly, they are also welfare-maximizing. The results reconcile a conventional wisdom that certification ratings alleviate information asymmetries with the concern that they appear coarse and opaque.

Keywords: certification, ratings, repeated games, reputation

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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