55 Pages Posted: 2 May 2019 Last revised: 7 Nov 2019
Date Written: April 1, 2019
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: Suggested Citation