Working Paper: NBER ID: w24916
Authors: Xiang Hui; Maryam Saeedi; Giancarlo Spagnolo; Steven Tadelis
Abstract: Markets with asymmetric information will often employ third-party certification labels to distinguish between higher and lower quality transactions, yet little is known about the effects of certification policies on the evolution of markets. How does the stringency in quality certification affect the intensity and composition of entry, incumbents' reactions, and market outcomes? We use detailed administrative data and exploit a policy change on eBay to explore how a more selective certification policy affects entry and behavior across a rich set of online market segments. We find that after the policy change, entry increases and does so more intensely in markets where it is harder to become certified. The average quality of entrants also increases more in the more affected markets, while the quality distribution of entrants exhibits fatter tails ex post. Finally, some incumbents increase the quality of their service to maintain certification and deliver higher quality after the policy change. The results help inform the design of certification policies in electronic and other markets with asymmetric information.
Keywords: Certification; Reputation; Market Entry; Quality Distribution
JEL Codes: D47; D82; L15; L86
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Certification policy change (G18) | Market entry (L17) |
| Certification policy change (G18) | Quality of entrants (L15) |
| Loss of certification badge (Y70) | Quality improvement among incumbents (L15) |
| Drop in fraction of badged sellers (D16) | Market entry (L17) |
| Certification policy change (G18) | Quality composition of entrants (L15) |