Who Should Pay for Certification?
Who does, and who should initiate costly certification by a third party under asymmetric quality information, the buyer or the seller? Our answer â€” the seller â€” follows from a nonâ€“trivial analysis revealing a clear intuition. Buyerâ€“induced certification acts as an inspection device, whence sellerâ€“induced certification acts as a signalling device. Sellerâ€“induced certification maximizes the certifierâ€™s profit and social welfare. This suggests the general principle that certification is, and should be induced by the better informed party. The results are reflected in a case study from the automotive industry, but apply also to other markets â€“ in particular the financial market.
|Date of creation:||Jun 2010|
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- Albano, Gian Luigi & Lizzeri, Alessandro, 2001. "Strategic Certification and Provision of Quality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 267-283, February.
- George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.