Firm Certification

Abstract

I study the design of certification schemes for a firm who faces a sequence of consumers confronted with adverse selection and dynamic moral hazard problems. I show that a certifier extracts the full net market surplus and maximizes social welfare by using a low-standard, honors certification scheme: at each time, a firm who signed up for certification is either “certified” or “certified with honors;” moreover, an inept firm is always certified. I relate my findings to common concerns about the ability of such certification schemes to alleviate information asymmetries, despite the prevalence of these schemes in practice.

Keywords: certification, reputation, mechanism design

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