Welfare Effects of Certification under Latent Adverse Selection

Anthony Creane, Thomas Jeitschko and Kyoungbo Sim

MPRA Paper from University Library of Munich, Germany

Abstract: Asymmetric information is a classic example of market failure that undermines the efficiency associated with perfectly competitive market outcomes: the “lemons” market. Credible certification, that substantiates unobservable characteristics of products that consumers value, is often considered a potential solution to such market failure. This paper examines welfare effects of certification in markets in which there is asymmetric information, but without an adverse selection problem. We analyze the market equilibrium when the certification technology becomes available and contrast this with the equilibrium without certification. We find that despite an improvement in allocative efficiency, overall welfare may decrease due to the possibility of certification when such certification is either costly or inaccurate. In fact, most of these results are not derived from the direct welfare cost of certification, but rather from certification’s effect on the market(s).

Keywords: Credible certification; welfare-reducing certification; asymmetric information; adverse selection. (search for similar items in EconPapers)
JEL-codes: D4 D41 D8 L1 (search for similar items in EconPapers)
Date: 2019-03-07
New Economics Papers: this item is included in nep-com and nep-mic
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https://mpra.ub.uni-muenchen.de/92595/1/MPRA_paper_92595.pdf original version (application/pdf)

Related works:
Working Paper: Welfare effects of certification under latent adverse selection (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:92595

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