McDonald's or the Michelin Guide? Revealing Quality Through Private-Sector Certification
AbstractIn markets where buyers cannot observe the quality of sellers' goods, there may be a role for intermediation. A certification intermediary is an agent that gathers information about seller quality and reports it to buyers. This paper examines the choice of such an intermediary between selling guidebooks to buyers, privately informing them about seller quality, and selling certificates to the sellers, publicly certifying the quality of their goods. I find that the intermediary will choose to sell guidebooks when the difference between high and low quality is large and when high quality is relatively rare (or difficult to provide). Furthermore, I show that there is a complementarity between certification and the production of quality. Markets may fail to form as the result of a coordination failure, in which high-quality sellers do not enter the market because there is no one to certify their quality, and certifiers are not credible as a result of the lack of high-quality sellers.
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