Test Design and Minimum Standards
Peter M. DeMarzo, Ilan Kremer, Andrzej Skrzypacz
American Economic Review · 2019 · Volume 109 · Issue 6
Abstract
We analyze test design and certification standards when an uninformed seller has the option to generate and disclose costly information regarding asset quality. We characterize equilibria by a minimum principle: the test and disclosure policy are chosen to minimize the asset's value conditional on nondisclosure. Thus, when sellers choose the information provided, simple pass/fail certification tests are likely to dominate the market. A social planner could raise informational and allocative efficiency, and lower deadweight testing costs, by raising the certification standard. Monopolist certifiers also satisfy the minimum principle but set a higher standard and reduce testing rates to maximize revenue.
Keywords
Market Structure, Pricing, and Design: Monopoly, Search, Learning, Information and Knowledge, Communication, Belief, Unawareness, Monopoly, Monopolization Strategies, Information and Product Quality, Standardization and Compatibility
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