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Optimal certification policy, entry, and investment in the presence of public signals

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  • Jay Pil Choi
  • Arijit Mukherjee

Abstract

We explore the optimal disclosure policy of a certification intermediary where (i) the seller decides on entry and investment in product quality, and (ii) the buyers observe an additional public signal on quality. The optimal policy maximizes rent extraction from the seller by trading off incentives for entry and investment. We identify conditions under which full, partial or no disclosure can be optimal. The intermediary's report becomes noisier as the public signal gets more precise, but if the public signal is sufficiently precise, the intermediary resorts to full disclosure. However, the social welfare may reduce when the public signal becomes more informative.

Suggested Citation

  • Jay Pil Choi & Arijit Mukherjee, 2020. "Optimal certification policy, entry, and investment in the presence of public signals," RAND Journal of Economics, RAND Corporation, vol. 51(4), pages 989-1013, December.
    • Handle: RePEc:bla:randje:v:51:y:2020:i:4:p:989-1013
    DOI: 10.1111/1756-2171.12347
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    Cited by:

    1. Bizzotto, Jacopo & Harstad, Bård, 2023. "The certifier for the long run," International Journal of Industrial Organization, Elsevier, vol. 87(C).

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