Working Paper: CEPR ID: DP8190
Authors: Konrad O. Stahl; Roland Strausz
Abstract: Who does, and who should initiate costly certification by a third party under asymmetric quality information, the buyer or the seller? Our answer --- the seller --- follows from a non--trivial analysis revealing a clear intuition. Buyer--induced certification acts as an inspection device, whence seller--induced certification acts as a signalling device. Seller--induced certification maximizes the certifier'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 -- in particular the financial market.
Keywords: Asymmetric Information; Certification; Information Acquisition; Inspection; Lemons; Middlemen; Signaling
JEL Codes: D40; D82; L14; L15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| seller-induced certification (L85) | higher profits for the certifier (L15) |
| seller-induced certification (L85) | more efficient allocation of resources (D61) |
| certifier's profit (D49) | social welfare (I38) |
| seller-induced certification (L85) | signaling device for high-quality sellers (L15) |
| high-quality sellers (L15) | distinguish themselves from low-quality sellers (L15) |