Firm Certification

42 Pages Posted: 2 May 2019 Last revised: 25 Feb 2021

Date Written: April 1, 2019

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

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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