Optimal certification policy, entry, and investment in the presence of public signals

Jay Pil Choi and Arijit Mukherjee

RAND Journal of Economics, 2020, vol. 51, issue 4, 989-1013

Abstract: We explore the optimal disclosure policy of a certification intermediary where (i) the seller decides on entry and investment in product quality, and (ii) the buyers observe an additional public signal on quality. The optimal policy maximizes rent extraction from the seller by trading off incentives for entry and investment. We identify conditions under which full, partial or no disclosure can be optimal. The intermediary's report becomes noisier as the public signal gets more precise, but if the public signal is sufficiently precise, the intermediary resorts to full disclosure. However, the social welfare may reduce when the public signal becomes more informative.

Date: 2020
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https://doi.org/10.1111/1756-2171.12347

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Persistent link: https://EconPapers.repec.org/RePEc:bla:randje:v:51:y:2020:i:4:p:989-1013

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