Two-sided reputation in certification markets

Matthieu Bouvard and Raphaël Levy

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: We consider a market where privately informed sellers resort to certification to overcome adverse selection. There is uncertainty about the certifier's ability to generate accurate information. The profit of a monopolistic certifier is an inverted U-shaped function of his reputation for accuracy: being perceived as more precise allows to attract more good sellers but a high expected precision also deters bad sellers. Since the certifier tries to reach a balanced reputation to attract both types, reputation has a disciplining effect when the certifier is perceived as insufficiently accurate, but gives incentives to decrease precision when he is perceived as “too" accurate. The impact of competition depends on whether sellers “multihome" or “singlehome". Under singlehoming, certifiers compete to attract good sellers, which makes higher reputation more valuable. Multihoming makes higher reputations less desirable because the competitor exerts a negative externality by providing extra information. Therefore, singlehoming attenuates bad reputation effects, while multihoming exacerbates inefficiencies.

Date: 2013-10
New Economics Papers: this item is included in nep-com, nep-cta, nep-mic and nep-net
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Citations: View citations in EconPapers (16)

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Related works:
Journal Article: Two-Sided Reputation in Certification Markets (2018)
Working Paper: Two-sided reputation in certification markets (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:trf:wpaper:446

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