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Optimal certification policy, entry, and investment in the presence of public signals
Author(s) -
Choi Jay Pil,
Mukherjee Arijit
Publication year - 2020
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12347
Subject(s) - certification , investment (military) , quality (philosophy) , incentive , business , product (mathematics) , public disclosure , signal (programming language) , industrial organization , microeconomics , public policy , economics , public economics , computer science , mechanical engineering , philosophy , programming language , geometry , mathematics , management , epistemology , politics , economic growth , political science , law , engineering
We explore the optimal disclosure policy of a certification intermediary where (i) the seller decides on entry and investment in product quality, and (ii) the buyers observe an additional public signal on quality. The optimal policy maximizes rent extraction from the seller by trading off incentives for entry and investment. 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 is sufficiently precise, the intermediary resorts to full disclosure. However, the social welfare may reduce when the public signal becomes more informative.