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Optimal certification policy, entry, and investment in the presence of public signals

Author

Listed:
  • Choi, Jay Pil

    (Michigan State University, Department of Economics)

  • Mukherjee, Arijit

    (Michigan State University, Department of Economics)

Abstract

We explore the optimal disclosure policy of a certification intermediary in an environment where (i) the seller's decision on entry and investment in product quality are endogenous and (ii) the buyers observe an additional public signal on quality. The intermediary mutes the seller's entry incentives but enhances investment incentives following entry, and the optimal policy maximizes rent extraction from the seller in the face of this trade-off. We identify conditions under which full, partial or no disclosure can be optimal. The intermediary's report becomes noisier as the public signal gets more precise, but if the public signal becomes too precise, the intermediary resorts to full disclosure. In the presence of an intermediary, a more precise public signal may also lead to lower social welfare.

Suggested Citation

  • Choi, Jay Pil & Mukherjee, Arijit, 2019. "Optimal certification policy, entry, and investment in the presence of public signals," Working Papers 2019-6, Michigan State University, Department of Economics.
    • Handle: RePEc:ris:msuecw:2019_006
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    References listed on IDEAS

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    More about this item

    Keywords

    Certification intermediaries; optimal disclosure policy; investment and entry incentives; public signal;
    All these keywords.

    JEL classification:

    • D04 - Microeconomics - - General - - - Microeconomic Policy: Formulation; Implementation; Evaluation
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods

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