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

Jay Pil Choi () and Arijit Mukherjee ()
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Jay Pil Choi: Michigan State University, Department of Economics, Postal: Department of Economics, Michigan State University, 110 Marshall-Adams Hall, 486 W. Circle Dr., East Lansing, MI 48824
Arijit Mukherjee: Michigan State University, Department of Economics, Postal: Department of Economics, Michigan State University, 110 Marshall-Adams Hall, 486 W. Circle Dr., East Lansing, MI 48824

No 2019-6, Working Papers from Michigan State University, Department of Economics

Abstract: We explore the optimal disclosure policy of a certification intermediary in an environment where (i) the seller's decision on entry and investment in product quality are endogenous and (ii) the buyers observe an additional public signal on quality. The intermediary mutes the seller's entry incentives but enhances investment incentives following entry, and the optimal policy maximizes rent extraction from the seller in the face of this trade-off. 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 becomes too precise, the intermediary resorts to full disclosure. In the presence of an intermediary, a more precise public signal may also lead to lower social welfare.

Keywords: Certification intermediaries; optimal disclosure policy; investment and entry incentives; public signal (search for similar items in EconPapers)
JEL-codes: D04 L12 L40 L43 L51 L52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-mic and nep-reg
Date: 2019-08-26
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Persistent link: https://EconPapers.repec.org/RePEc:ris:msuecw:2019_006

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