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Who should pay for certification?

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  • Stahl, Konrad
  • Strausz, Roland

Abstract

Who does, and who should initiate costly certification by a third party under asymmetric quality information, the buyer or the seller? Our answer - the seller - follows from a nontrivial analysis revealing a clear intuition. Buyer-induced certification acts as an inspection device, seller-induced certification as a signalling device. Seller-induced certification maximizes the certifier's profit and social welfare. This suggests the general principle that certification is, and should be induced by the better informed party. The results are reflected in a case study from the automotive industry, but apply also to other markets - in particular the financial market. --

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Bibliographic Info

Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 11-054.

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Date of creation: 2011
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Handle: RePEc:zbw:zewdip:11054

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Keywords: Asymmetric information; certification; information acquisition; inspection; lemons; middlemen; signaling;

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  1. Albano, Gian Luigi & Lizzeri, Alessandro, 2001. "Strategic Certification and Provision of Quality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 267-83, February.
  2. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
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Cited by:
  1. Jeon, Doh-Shin & Lovo, Stefano, 2013. "Credit Rating Industry: a Helicopter Tour of Stylized Facts and Recent Theories," TSE Working Papers 13-376, Toulouse School of Economics (TSE).
  2. Jeon, Doh-Shin & Lovo, Stefano, 2013. "Credit Rating Industry: a Helicopter Tour of Stylized Facts and Recent Theories," IDEI Working Papers 762, Institut d'Économie Industrielle (IDEI), Toulouse.

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