Thursday, June 25, 2020

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

  2. By: Choi, Jay Pil (Michigan State University, Department of Economics); Mukherjee, Arijit (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.

| Permalink


Post a comment