The Appeal of Third-party Certifications: Information Unraveling in Natural Experiments

Despite the abundance of studies on consequences of certification, there is little empirical research on what motivates sellers to attempt certifications in the first place. One of the most intriguing theoretical predictions is the “information unraveling” proposition, which predicts a “domino- effect” in sellers’ certification-seeking behavior when a certification opportunity arises. To test this proposition, and to further identify factors that motivate sellers to seek certifications, we exploit two unique natural experiments and detailed transaction data on a global online labor market. The first natural experiment was the introduction of certifications into the market, with a fee; and the second occurred when certification exams were made free. We derive and test hypotheses on factors that motivate sellers to seek certifications, including word-of-mouth, repeat customers, cost of certification, and informational cascading. We also find that, contrary to theoretical predictions, certification status negatively impacts some sellers’ ability to obtain contracts. These findings have important managerial as well as academic implications.