Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/194570
Authors: 
Creane, Anthony
Jeitschko, Thomas D.
Sim, Kyoungbo
Year of Publication: 
2019
Series/Report no.: 
DICE Discussion Paper 312
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).
Subjects: 
credible certification
welfare-reducing certification
asymmetric information
adverse selection
JEL: 
D8
D4
L1
ISBN: 
978-3-86304-311-7
Document Type: 
Working Paper
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