Abstract
This chapter provides an overview of the economic theory of certification as a solution to the informational problems of experience and credence goods. It starts with a non-technical presentation of the basic economic model of certification based on a paper by Kip Viscusi and then dwells on its variations: If one acknowledges that certifiers themselves produce an experience or credence good, it becomes obvious that certifiers are susceptible to the same temptations to hide or even falsify information as the producers of the underlying experience or credence goods. Certification of only a minimum quality is shown to be a possible market equilibrium with negative effects on the spread of qualities offered on the market. Heterogeneity of consumer preferences is reported as one of the sources that may increase information asymmetries between consumers and the certification agencies in the model. Finally, the chapter takes a brief look at the structure of the market for certifiers.
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Notes
- 1.
Viscusi (1978), p. 277.
- 2.
Nelson (1970), p. 311.
- 3.
- 4.
Akerlof (1970), p. 488.
- 5.
Viscusi (1978).
- 6.
Stahl and Strausz (2017), p. 1842, discuss the assumption that it is the producers who pay the certifier and not the consumer—an assumption prevailing in nearly all publications on certification. They show that in general, certification purchased by producers is (1) more informative due to the information contained in the decision to certify, which is partly observable and (2) superior from a welfare point of view. The result is reinforced by the argument that certification purchased by consumers may be obstructed by low-quality producers. The only exception to this result is subsidized certification: Stahl and Strausz show their central results hinge on the price for certification being at or above marginal costs of certification.
- 7.
Faulhaber and Yao (1989), p. 65, consider a different type of information producing agents: ‘reviewers’ who are paid by consumers rather than by producers, which turns the model from a signaling to a screening approach. As ‘reviewing’ is empirically much less relevant than certification, this paper concentrates on the latter.
- 8.
Biglaiser (1993), p. 212, was the first to mention these possibilities.
- 9.
Biglaiser (1993) circumvents this problem by assuming that certification only refers to a single unit of the good and each and every unit is certified individually.
- 10.
Strausz (2005), p. 45.
- 11.
- 12.
Peyrache and Quesada (2011) construct a model, in which the certifiers do not switch immediately from honesty to complete corruption when their time preference becomes too strong, but gradually increase the range of true qualities for which they accept bribes for exaggerating the quality in their report, when the relative value they attach to future profits declines.
- 13.
See Shapiro (1986), p. 843, for a first model studying the effects of input regulation in markets with reputation for output quality. Shapiro considers input regulation in two forms: licensing, i.e. abolition of supply by producers without a minimum education, and certification, i.e. truthful information of consumers about whether a producer has passed the minimum education or not. Note that Shapiro uses the term ‘certification’ for information on input qualification while in this paper I use it for information on output quality, in line with most of the economic certification literature.
- 14.
Kleiner (2000), p. 189, stresses this problem for occupational licensing in general.
- 15.
- 16.
Buehler and Schuett (2014), p. 493.
- 17.
van der Schaar and Zhang (2015), p. 509.
- 18.
Lizzeri (1999), p. 214.
- 19.
For an overview of further results supporting this claim, see Pollrich and Wagner (2016), pp. 345 and 346.
- 20.
Farhi et al. (2013), p. 610.
- 21.
Lerner and Tirole (2006), p. 109.
- 22.
- 23.
Das (2016), p. 251.
- 24.
The intuition for this surprising result is that non-certification and thus production of low quality may be a means to separate markets and thus collect monopoly rents on both markets. If differentiation by the second quality dimension is large enough, certification is not needed to differentiate products.
- 25.
Combining the search words “certification” and “bounded rationality” returns zero entries in EconLit and one for a law journal contribution in SSRN (Becher 2009, p. 747). scholar.google returns more entries, but none on the first pages really combines the two approaches. ISI Web of Science returns one case study (Pelaez et al. 2010, p. 27) and the only theory-based paper by Pu and Zhang (2016), Article No 953.
- 26.
Pu and Zhang (2016).
- 27.
Stahl and Strausz (2017) refer to this problem when comparing producer-purchased and consumer-purchased certification, but their model excludes nearly all other problems discussed in the current paper.
- 28.
Bischoff and Blaeschke (2016), p. 344.
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von Wangenheim, G. (2019). Certification as Solution to the Asymmetric Information Problem?. In: Rott, P. (eds) Certification – Trust, Accountability, Liability. Studies in European Economic Law and Regulation, vol 16. Springer, Cham. https://doi.org/10.1007/978-3-030-02499-4_2
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