Signaling and Quality Upgrading: Evidence from E-Commerce Certification in China

Abstract

E-commerce certification can signal a firm's quality, reducing information frictions and incentivizing quality upgrading. This paper examines the effect of certification on quality upgrading both econometrically and using a novel dynamic structural model. To this end, we collected data from Alibaba.com, one of the world's largest global Business-to-Business platforms, which launched its certification policy, "Gold Supplier," in 2000. We posit that signaling as a Gold Supplier is more costly for lower-quality firms. Combining Alibaba.com data with 2000–2015 Chinese Customs Data, we show that firm export quality increases after becoming a Gold Supplier and the effect is greater for smaller firms. Using the Simulated Method of Moments, we estimate a dynamic structural model that embeds information asymmetry, signaling, and quality upgrading. Counterfactual analysis shows that a 1% reduction in the differential cost of signaling increases total trade by 1.50% and that substantial changes in signaling costs can shift the market equilibrium.

Keywords: Signaling, Quality Upgrading, Certification, E-commerce

JEL Classification: F19, F69, L19