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Two-Sided Reputation in Certification Markets

Author

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  • Matthieu Bouvard

    (Desautels Faculty of Management, McGill University, Montreal, Quebec H3A 1G5, Canada)

  • Raphaël Levy

    (HEC Paris, 78351 Jouy en Josas Cedex, France)

Abstract

In a market where sellers solicit certification to overcome asymmetric information, we show that the profit of a monopolistic certifier can be hump-shaped in its reputation for accuracy: a higher accuracy attracts high-quality sellers but sometimes repels low-quality sellers. As a consequence, reputational concerns may induce the certifier to reduce information quality, thus depressing welfare. The entry of a second certifier impacts reputational incentives: when sellers only solicit one certifier, competition plays a disciplining role and the region where reputation is bad shrinks. Conversely, this region may expand when sellers hold multiple certifications.

Suggested Citation

  • Matthieu Bouvard & Raphaël Levy, 2018. "Two-Sided Reputation in Certification Markets," Management Science, INFORMS, vol. 64(10), pages 4755-4774, October.
  • Handle: RePEc:inm:ormnsc:v:64:y:2018:i:10:p:4755-4774
    DOI: 10.287/mnsc.2017.2742
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    Cited by:

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    2. Fischer, Thomas, 2015. "Market structure and rating strategies in credit rating markets – A dynamic model with matching of heterogeneous bond issuers and rating agencies," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 39-56.
    3. Belleflamme, Paul & Omrani, Nessrine & Peitz, Martin, 2015. "The economics of crowdfunding platforms," Information Economics and Policy, Elsevier, vol. 33(C), pages 11-28.
    4. Heidrun Hoppe-Wewetzer & Christian Siemering, 2022. "Advertisement-financed credit ratings," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 46(1), pages 188-206, January.
    5. Joel Shapiro & David Skeie, 2015. "Information Management in Banking Crises," The Review of Financial Studies, Society for Financial Studies, vol. 28(8), pages 2322-2363.
    6. Baghai, Ramin P. & Becker, Bo, 2020. "Reputations and credit ratings: Evidence from commercial mortgage-backed securities," Journal of Financial Economics, Elsevier, vol. 135(2), pages 425-444.
    7. Ascensión Andina-Díaz, 2015. "Competition and uncertainty in a paper’s news desk," Journal of Economics, Springer, vol. 116(1), pages 77-93, September.
    8. Julien Jacqmin & Mathieu Lefebvre, 2021. "The effect of international accreditations on students’ decisions: Evidence from French business schools," Working Papers of BETA 2021-06, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    9. Jeon, Doh-Shin & Lovo, Stefano, 2013. "Credit rating industry: A helicopter tour of stylized facts and recent theories," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 643-651.
    10. Wenming Xu & Yan Liu, 2021. "Does reputational capital affect credit rating agencies?: empirical evidence from a natural experiment in China," European Journal of Law and Economics, Springer, vol. 51(3), pages 433-468, June.
    11. Hulya Eraslan & Saltuk Ozerturk, 2018. "Information Gatekeeping and Media Bias," Koç University-TUSIAD Economic Research Forum Working Papers 1808, Koc University-TUSIAD Economic Research Forum.
    12. Paul Belleflamme & Martin Peitz, 2018. "Inside the Engine Room of Digital Platforms: Reviews, Ratings, and Recommendations," Working Papers halshs-01714549, HAL.
    13. Florian Kiesel, 2021. "It's the tone, stupid! Soft information in credit rating reports and financial markets," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 44(3), pages 553-585, September.
    14. Kisgen, Darren J. & Nickerson, Jordan & Osborn, Matthew & Reuter, Jonathan, 2020. "Analyst Promotions within Credit Rating Agencies: Accuracy or Bias?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 55(3), pages 869-896, May.
    15. Tao Wang, 2023. "A Study on the Choice of Online Marketplace Co-Opetition Strategy Considering the Promotional Behavior of a Store on an E-Commerce Platform," Mathematics, MDPI, vol. 11(10), pages 1-16, May.
    16. Hongchang Wang & Benjamin Williams & Karen Xie & Wei Chen, 2024. "Quality Differentiation and Matching Performance in Peer-to-Peer Markets: Evidence from Airbnb Plus," Management Science, INFORMS, vol. 70(7), pages 4260-4282, July.
    17. Terovitis, Spyros, 2022. "Information disclosure and the feedback effect in capital markets," Journal of Financial Intermediation, Elsevier, vol. 49(C).
    18. Sivan Frenkel, 2015. "Repeated Interaction and Rating Inflation: A Model of Double Reputation," American Economic Journal: Microeconomics, American Economic Association, vol. 7(1), pages 250-280, February.
    19. Bar-Isaac, Heski & Deb, Joyee, 2014. "What is a good reputation? Career concerns with heterogeneous audiences," International Journal of Industrial Organization, Elsevier, vol. 34(C), pages 44-50.
    20. Hoppe-Wewetzer, Heidrun C. & Siemering, Christian, 2020. "Advertisement-Financed Credit Ratings," CEPR Discussion Papers 14735, C.E.P.R. Discussion Papers.
    21. Farkas, Miklós, 2021. "Competition, communication and rating bias," Journal of Economic Behavior & Organization, Elsevier, vol. 189(C), pages 637-656.
    22. Bingyou Chen & Yu Luo & Jieni Li & Yujian Li & Ying Liu & Fan Yang & Junge Bo & Yanan Qiao, 2023. "Blockchain-based Decentralized Co-governance: Innovations and Solutions for Sustainable Crowdfunding," Papers 2306.00869, arXiv.org, revised Jun 2023.
    23. Eraslan, Hulya & Ozerturk, Saltuk, 2017. "Information Gatekeeping and Media Bias," Working Papers 17-001, Rice University, Department of Economics.

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    More about this item

    Keywords

    reputation; certification; credit rating agencies;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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