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A dynamic model of certification and reputation

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  • Mihaela Schaar
  • Simpson Zhang

Abstract

Markets typically have many ways of learning about quality, with two of the most important being reputational forces and certification, and these types of learning often interact with and influence each other. This paper is the first to consider markets where learning occurs through these different sources simultaneously, which allows us to investigate the rich interplay and dynamics that can arise. Our work offers four main insights: (1) Without certification, market learning through reputation alone can get “stuck” at inefficient levels and high-quality agents may get forced out of the market. (2) Certification “frees” the reputation of agents, allowing good agents to keep working even after an unfortunate string of bad signals. (3) Certification can be both beneficial and harmful from a social perspective, so a social planner must choose the certification scheme carefully. In particular, the market will tend to demand more certification than socially optimal because the market does not bear the certification costs. (4) Certification and reputational learning can act as complementary forces so that the social welfare produced by certification can be increased by faster information revelation. Copyright Springer-Verlag Berlin Heidelberg 2015

Suggested Citation

  • Mihaela Schaar & Simpson Zhang, 2015. "A dynamic model of certification and reputation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 58(3), pages 509-541, April.
  • Handle: RePEc:spr:joecth:v:58:y:2015:i:3:p:509-541
    DOI: 10.1007/s00199-014-0836-9
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    References listed on IDEAS

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    1. George J. Mailath & Larry Samuelson, 2001. "Who Wants a Good Reputation?," Review of Economic Studies, Oxford University Press, vol. 68(2), pages 415-441.
    2. Ely, Jeffrey & Fudenberg, Drew & Levine, David K., 2008. "When is reputation bad?," Games and Economic Behavior, Elsevier, vol. 63(2), pages 498-526, July.
    3. Stahl, Konrad & Strausz, Roland, 2010. "Who Should Pay for Certification?," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 323, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
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    14. Panzar John C & Savage Ian, 2011. "Does a Minimum Quality Standard Always Reduce the Price of High Quality Products?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-32, June.
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    Cited by:

    1. Thomas, Caroline, 2019. "Experimentation with reputation concerns – Dynamic signalling with changing types," Journal of Economic Theory, Elsevier, vol. 179(C), pages 366-415.
    2. Yanying Chen & Liang Ping & Feng Helen Liang, 2023. "Industry Reputation Crisis and Firm Certification: A Co-evolution Perspective," Journal of Business Ethics, Springer, vol. 186(4), pages 761-780, September.

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    More about this item

    Keywords

    Certification; Reputation; Learning; Market Design; Social welfare; D82; D83; D47; M51;
    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
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions

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