Two-Sided Reputation in Certification Markets
Matthieu Bouvard, Raphaël Levy
Management Science · 2018 · Volume 64 · Issue 10
Abstract
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. This paper was accepted by Gustavo Manso, finance.
Keywords
reputation, certification, credit rating agencies
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