Test Design and Minimum Standards

Peter DeMarzo, Ilan Kremer and Andrzej Skrzypacz

American Economic Review, 2019, vol. 109, issue 6, 2173-2207

Abstract: We analyze test design and certification standards when an uninformed seller has the option to generate and disclose costly information regarding asset quality. We characterize equilibria by a minimum principle: the test and disclosure policy are chosen to minimize the asset's value conditional on nondisclosure. Thus, when sellers choose the information provided, simple pass/fail certification tests are likely to dominate the market. A social planner could raise informational and allocative efficiency, and lower deadweight testing costs, by raising the certification standard. Monopolist certifiers also satisfy the minimum principle but set a higher standard and reduce testing rates to maximize revenue.

JEL-codes: D42 D83 L12 L15 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/aer.20171722
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Citations: View citations in EconPapers (9)

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