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Certification, Reputation and Entry: An Empirical Analysis

Xiang Hui, Maryam Saeedi, Giancarlo Spagnolo and Steven Tadelis

No 24916, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Markets with asymmetric information will often employ third-party certification labels to distinguish between higher and lower quality transactions, yet little is known about the effects of certification policies on the evolution of markets. How does the stringency in quality certification affect the intensity and composition of entry, incumbents' reactions, and market outcomes? We use detailed administrative data and exploit a policy change on eBay to explore how a more selective certification policy affects entry and behavior across a rich set of online market segments. We find that after the policy change, entry increases and does so more intensely in markets where it is harder to become certified. The average quality of entrants also increases more in the more affected markets, while the quality distribution of entrants exhibits fatter tails ex post. Finally, some incumbents increase the quality of their service to maintain certification and deliver higher quality after the policy change. The results help inform the design of certification policies in electronic and other markets with asymmetric information.

JEL-codes: D47 D82 L15 L86 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com and nep-pay
Date: 2018-08
Note: IO PR
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