Articles

Two-sided reputation in certification markets

M. BOUVARD, R. LEVY

Management Science

Forthcoming

Departments: Economics & Decision Sciences, GREGHEC (CNRS)

Keywords: Certification, Reputation, Credit rating agencies

https://pubsonline.informs.org/doi/pdf/10.1287/mnsc.2017.2742


In a market where sellers solicit certification to overcome asymmetric information, we show that the profit of a monopolistic certifier can be hump-shaped in its reputation for accuracy: a higher accuracy attracts high-quality sellers but sometimes repels low-quality sellers. As a consequence, reputational concerns may induce the certifier to reduce information quality, thus depressing welfare. The entry of a second certifier impacts reputational incentives: when sellers only solicit one certifier, competition plays a disciplining role and the region where reputation is bad shrinks. Conversely, this region may expand when sellers hold multiple certifications


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