Certification Disclosure and Informational Efficiency: A Case for Ordered Ranking of Levels

Gerardo A. Guerra

No 64, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: This paper shows that a monopolistic certifying party can have incentives to disclose revealing information about the agent he is certifying. Using a three-person game-theoretic model and allowing certificate users (buyers) to have noisy estimates of the quality level of the agent being certified (seller), a disclosure in the form of ordered ranking of levels is predicted. This contrasts with previous results in certification theory stating that monopolistic certifiers disclose a minimum amount of information (with no informational value) about the party being certified, in order to extract all informational rents from the market. The predicted disclosure is consistent with real life observations of certification disclosure as found in debt rating (notches) and hotels listings (using a discrete system of stars). The model is robust enough to explain the results of previous models. The paper also adds to the existing literature an evaluation of four different strategies of information disclosure that are available to a certifier.

Keywords: certification; information asymmetry; disclosure strategies (search for similar items in EconPapers)
JEL-codes: C72 D18 D82 L15 L86 (search for similar items in EconPapers)
Date: 2001-01-01
References: Add references at CitEc
Citations: View citations in EconPapers (7)

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