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Dynamic Certification and Reputation for Quality

Ivan Marinovic, Andrzej Skrzypacz and Felipe Varas
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Ivan Marinovic: Stanford University
Felipe Varas: Duke University

Research Papers from Stanford University, Graduate School of Business

Abstract: We study firm's incentives to invest and build reputation for quality, when quality can be certified at a cost. We consider two types of equilibria: one in which certification decisions are made based on firm's reputation and the second in which they are made based on the time since last certification. We show that reputation-based certification has a very limited effect on incentives to invest in quality, so that in equilibrium the firm invests only its reputation is the lowest. We also show that the firm in this case suffers from an over-certification trap in which the benefits of reputation are dissipated by excessive certification. These problems can be avoided with time-based certification, which can allow first-best investment in quality for sufficiently small certification cost, despite investment being unobservable. We also show that the optimal certification duration results in the firm certifying when its reputation is high.

JEL-codes: C73 D82 D83 D84 (search for similar items in EconPapers)
Date: 2015-11
New Economics Papers: this item is included in nep-com and nep-mic
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Journal Article: Dynamic Certification and Reputation for Quality (2018) Downloads
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