Honest versus Misleading Certification

Philippe Mahenc

No CE3S-06/15, CEEES Paper Series from European University at St. Petersburg, Department of Economics

Abstract: This paper questions the honesty of third-party certification in the market for a good whose environmental quality is not observable by consumers. The certifier maximizes a weighted sum of its own revenue and social welfare. The higher the relative weight placed on revenue, the stronger the certifiers incentive to mislead consumers. Certification is analyzed as a costly signaling mechanism that, besides displaying labels, transmits information through market prices. Honest certification requires that prices credibly signal environmental quality to prevent cheating. I show that certification can only be honest when the certifier is driven more by social welfare than by profit. In the reverse case, the certifier cannot help jamming the price signal, thereby granting unreliable labels.

Keywords: Bayesian inference; certification; credence good; signaling (search for similar items in EconPapers)
JEL-codes: D82 Q28 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2015-11-19
New Economics Papers: this item is included in nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Honest versus Misleading Certification (2017)
Working Paper: Honest versus misleading certification (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eus:ce3swp:0615

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