Competition and Misconduct in Certification Markets with Externalities

Nano Barahona, Juan-Pablo Montero and Pedro Skorin

No 35422, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Vehicle inspections—commonly known as smog and safety checks—are often delegated to private agents, much like other quality certification markets. When these agents compete, they face incentives to misreport quality—especially when consumers do not internalize the external costs of misreporting. Theory and evidence from Chile’s concentrated vehicle-inspection markets suggest that these incentives are significant: misreporting emerges as soon as competition is introduced. We find that delegating each market to a single agent proves effective in reducing approval rates, without compromising service quality or the ex-ante competition for the market, while delivering substantial and permanent reductions in vehicle emissions.

JEL-codes: C72 D43 L51 Q58 (search for similar items in EconPapers)
Date: 2026-07
Note: EEE IO
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