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Certification Disclosure and Informational Efficiency: A Case for Ordered Ranking of Levels


  • Gerardo A. Guerra


This paper shows that a monopolistic certifying party can have incentives to disclose revealing information about the agent he is certifying. Using a three-person game-theoretic model and allowing certificate users (buyers) to have noisy estimates of the quality level of the agent being certified (seller), a disclosure in the form of ordered ranking of levels is predicted. This contrasts with previous results in certification theory stating that monopolistic certifiers disclose a minimum amount of information (with no informational value) about the party being certified, in order to extract all informational rents from the market. The predicted disclosure is consistent with real life observations of certification disclosure as found in debt rating (notches) and hotels listings (using a discrete system of stars). The model is robust enough to explain the results of previous models. The paper also adds to the existing literature an evaluation of four different strategies of information disclosure that are available to a certifier.

Suggested Citation

  • Gerardo A. Guerra, 2001. "Certification Disclosure and Informational Efficiency: A Case for Ordered Ranking of Levels," Economics Series Working Papers 64, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:64

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    References listed on IDEAS

    1. Caballero, Ricardo J., 1990. "Consumption puzzles and precautionary savings," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 113-136, January.
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    3. Kimball, Miles S & Mankiw, N Gregory, 1989. "Precautionary Saving and the Timing of Taxes," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 863-879, August.
    4. John Y. Campbell & John H. Cochrane, 1994. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," CRSP working papers 412, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    5. Gali, Jordi, 1994. "Keeping Up with the Joneses: Consumption Externalities, Portfolio Choice, and Asset Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(1), pages 1-8, February.
    6. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
    7. Philippe Weil, 1993. "Precautionary Savings and the Permanent Income Hypothesis," Review of Economic Studies, Oxford University Press, vol. 60(2), pages 367-383.
    8. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
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    Cited by:

    1. Ginger Zhe Jin & Andrew Kato & John A. List, 2010. "That'S News To Me! Information Revelation In Professional Certification Markets," Economic Inquiry, Western Economic Association International, vol. 48(1), pages 104-122, January.

    More about this item


    certification; information asymmetry; disclosure strategies;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software


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