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Dynamic Certification and Reputation for Quality

Author

Listed:
  • Iván Marinovic
  • Andrzej Skrzypacz
  • Felipe Varas

Abstract

We study firm's incentives to build and maintain reputation for quality, when quality is persistent and can be certified at a cost. We characterize all reputation-dependent MPEs. They vary in frequency of certification and payoffs. Low payoffs arise in equilibria because of over-certification traps. We contrast the MPEs with the highest payoff equilibria. Industry certification standards can help firms coordinate on such good equilibria. The optimal equilibria allow firms to maintain high quality forever, once it is reached for the first time. They are either lenient or harsh, endowing firms with multiple or one chance to improve and certify quality.

Suggested Citation

  • Iván Marinovic & Andrzej Skrzypacz & Felipe Varas, 2018. "Dynamic Certification and Reputation for Quality," American Economic Journal: Microeconomics, American Economic Association, vol. 10(2), pages 58-82, May.
    • Handle: RePEc:aea:aejmic:v:10:y:2018:i:2:p:58-82
    Note: DOI: 10.1257/mic.20160282
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    Cited by:

    1. Manuel Amador & Christopher Phelan, 2021. "Reputation and Sovereign Default," Econometrica, Econometric Society, vol. 89(4), pages 1979-2010, July.
    2. Daniel Hauser, 2016. "Promoting a Reputation for Quality," PIER Working Paper Archive 16-014, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 29 Sep 2016.
    3. Michelson, Hope & Fairbairn, Anna & Ellison, Brenna & Maertens, Annemie & Manyong, Victor, 2021. "Misperceived quality: Fertilizer in Tanzania," Journal of Development Economics, Elsevier, vol. 148(C).
    4. Nikhil Vellodi, 2018. "Ratings Design and Barriers to Entry," Working Papers 18-13, NET Institute.
    5. Wong, Tsz-Ning & Yang, Lily Ling, 2021. "Dynamic expert incentives in teams," Games and Economic Behavior, Elsevier, vol. 125(C), pages 27-47.
    6. Goel, Rajeev K. & Nelson, Michael A., 2020. "Do external quality certifications improve firms’ conduct? International evidence from manufacturing and service industries," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 97-104.
    7. Erfan Rezvani & Christian Rojas, 2022. "Firm responsiveness to consumers' reviews: The effect on online reputation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(4), pages 898-922, November.
    8. Bertomeu, Jeremy & Marinovic, Iván & Terry, Stephen J. & Varas, Felipe, 2022. "The dynamics of concealment," Journal of Financial Economics, Elsevier, vol. 143(1), pages 227-246.
    9. Dong Yan & Christian A. Vossler & Scott M. Gilpatric, 2020. "Product quality and third-party certification in potential lemons markets," Working Papers 2020-04, University of Tennessee, Department of Economics.
    10. Marina Halac & Andrea Prat, 2016. "Managerial Attention and Worker Performance," American Economic Review, American Economic Association, vol. 106(10), pages 3104-3132, October.
    11. Benjamin B. Bederson & Ginger Zhe Jin & Phillip Leslie & Alexander J. Quinn & Ben Zou, 2018. "Incomplete Disclosure: Evidence of Signaling and Countersignaling," American Economic Journal: Microeconomics, American Economic Association, vol. 10(1), pages 41-66, February.
    12. Stenzel, André & Wolf, Christoph, 2016. "Consumer Rating Dynamics," VfS Annual Conference 2016 (Augsburg): Demographic Change 145694, Verein für Socialpolitik / German Economic Association.
    13. Chong Huang & Fei Li & Xi Weng, 2020. "Star Ratings and the Incentives of Mutual Funds," Journal of Finance, American Finance Association, vol. 75(3), pages 1715-1765, June.

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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