Verification In Contracts With Random Changes In Quality
AbstractMany goods and services are subject to random changes in quality during the time between sale and delivery, resulting in markets characterized by lemons-market equilibria. We examine two forms of costly verification, ex post inspection and ex ante certification. In equilibrium, ex post verification is used to verify buyers' reports of low quality, while ex ante certification is used to verify sellers' shipments of high quality. Ex post inspection allows buyers to earn rents; in some circumstances, ex ante certification allows sellers to earn rents. One would expect buyers to prefer ex post inspection while sellers prefer ex ante certification.
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Bibliographic InfoPaper provided by University of Maryland, Department of Agricultural and Resource Economics in its series Working Papers with number 28565.
Date of creation: 2000
Date of revision:
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