Firm Certification

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