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Informational Opacity and Honest Certification

  • Martin Pollrich
  • Lilo Wagner

This paper studies the interaction of information disclosure and reputational concerns in certification markets. We argue that by revealing less precise information a certifier reduces the threat of capture. Opaque disclosure rules may reduce profits but also constrain feasible bribes. For large discount factors a certifier is unconstrained in the choice of a disclosure rule and full disclosure maximizes profits. For intermediate discount factors, only less precise, such as noisy, disclosure rules are implementable. Our results suggest that contrary to the common view, coarse disclosure may be socially desirable. A ban may provoke market failure especially in industries where certifier reputational rents are low.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.419361.de/dp1291.pdf
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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1291.

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Length: 36 p.
Date of creation: 2013
Date of revision:
Handle: RePEc:diw:diwwpp:dp1291
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  1. Langinier, Corinne & Babcock, Bruce A., 2006. "Agricultural Production Clubs: Viability and Welfare Implications," Staff General Research Papers 12670, Iowa State University, Department of Economics.
  2. Mathis, Jérôme & McAndrews, James & Rochet, Jean-Charles, 2009. "Rating the raters: Are reputation concerns powerful enough to discipline rating agencies?," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 657-674, July.
  3. Faure-Grimaud, Antoine & Peyrache, Eloïc & Quesada, Lucía, 2005. "The Ownership of Ratings," CEPR Discussion Papers 5432, C.E.P.R. Discussion Papers.
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