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Certification Disclosure and Informational Efficiency: A Case for Ordered Ranking of Levels

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  • Gerardo A. Guerra
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    Abstract

    This paper shows that a monopolistic certifying party can have incentives to disclose revealing information about the agent he is certifying. Using a three-person game-theoretic model and allowing certificate users (buyers) to have noisy estimates of the quality level of the agent being certified (seller), a disclosure in the form of ordered ranking of levels is predicted. This contrasts with previous results in certification theory stating that monopolistic certifiers disclose a minimum amount of information (with no informational value) about the party being certified, in order to extract all informational rents from the market. The predicted disclosure is consistent with real life observations of certification disclosure as found in debt rating (notches) and hotels listings (using a discrete system of stars). The model is robust enough to explain the results of previous models. The paper also adds to the existing literature an evaluation of four different strategies of information disclosure that are available to a certifier.

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    File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper064.pdf
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    Bibliographic Info

    Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 64.

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    Date of creation: 01 Jan 2001
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    Handle: RePEc:oxf:wpaper:64

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    Related research

    Keywords: certification; information asymmetry; disclosure strategies;

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    Cited by:
    1. Ginger Zhe Jin & Andrew Kato & John A. List, 2010. "That'S News To Me! Information Revelation In Professional Certification Markets," Economic Inquiry, Western Economic Association International, vol. 48(1), pages 104-122, 01.

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