Certifying New Technologies

Emmanuel Farhi, Josh Lerner and Jean Tirole

Journal of the European Economic Association, 2005, vol. 3, issue 2-3, 734-744

Abstract: We study the role of Standard Setting Organization (SSOs) in the adoption of standards. The way the SSO balances the interests of sponsor and users is key to its ability to certify the technology. Proximity to users builds trust in the endorsement, but may be unattractive to technology sponsors. In a static context, we show that the SSO is an effective certifier if and only if it puts enough weight on users' interests. We then tackle the more challenging problem of SSO certification in a dynamic setting in which new information will accrue in the future and user choices are irreversible. The SSO and the users must then both take a dynamic perspective and contemplate the possibility of a "second chance" that may arise for the standard. A key insight is the possibility of multiple self-fulfilling expectations. It is possible to have an equilibrium with no second chance, a lenient SSO endorsement policy and high stigma from early rejection. It is also possible to have an equilibrium with a second chance, a selective SSO endorsement policy and low stigma from early rejection. Finally, and in both the static and the dynamic setups, we ask whether the SSO is too inclined to turn down or to accept the standard from a social viewpoint. (JEL: D71, D82, L15, O31) Copyright (c) 2005 The European Economic Association.

Date: 2005
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