Mihaela van der Schaar
ABSTRACT
Markets typically have many ways of learning about quality, with two of the most important being reputational forces and certification, and these types of learning often interact with and influence each other. This paper is the first to consider markets where learning occurs through these different sources simultaneously, which allows us to demonstrate the rich interplay and dynamics that can arise. Our work offers four main insights: (1) Without certification, market learning through reputation alone can get 'stuck' at inefficient levels and high quality agents may get forced out of the market. (2) Certification 'frees' the reputation of agents, allowing good agents to keep working even after an unfortunate string of bad signals. (3) Certification can be both beneficial and harmful, and so the social planner must choose the certification scheme carefully. In particular, the market will tend to demand more certification than socially optimal because the market does not bear the certification costs. (4) Certification and reputational learning can act as complementary forces so that a more informative reputational mechanism will increase the social welfare generated by certification.
- Atkeson, A., Hellwig, C., & Ordonez, G. (2012). Optimal regulation in the presence of reputation concerns (No. w17898). National Bureau of Economic Research.Google Scholar
- Bar-Isaac, H. (2003). Reputation and Survival: Learning in a Dynamic Outputling Model. The Review of Economic Studies, 231--251.Google Scholar
- Bar-Isaac, H., & Tadelis, S. (2008). Seller Reputation. Foundations and Trends in Microeconomics.Google Scholar
- Board, S., & Meyer-ter-Vehn, M. (2010). Reputation For Quality. Mimeo.Google Scholar
- Chung, K.-S., & Eso, P. (2007). Outputling with Career Concerns. Mimeo.Google Scholar
- Bonatti, A. (2011). Menu Pricing and Learning. American Economic Journal: Microeconomics, 3(3), 124--163.Google ScholarCross Ref
- Bolton, P., Freixas, X., & Shapiro, J. (2009). The credit ratings game (No. w14712). National Bureau of Economic Research.Google Scholar
- Ely, J., Fudenberg, D., & Levine, D. K. (2008). When is reputation bad'. Games and Economic Behavior, 63(2), 498--526.Google ScholarCross Ref
- Ely, J. C., & Välimäki, J. (2003). Bad reputation. The Quarterly Journal of Economics, 118(3), 785--814.Google ScholarCross Ref
- Gill, D., & Sgroi, D. (2012). The optimal choice of pre-launch reviewer. Journal of Economic Theory, 147(3), 1247--1260.Google ScholarCross Ref
- Farhi, E., Lerner, J. & Tirole, J. (2013). Fear of Rejection' Tiered Certification and Transparency. mimeoGoogle Scholar
- Holmström, B. (1999). Managerial incentive problems: A dynamic perspective. The Review of Economic Studies, 66(1), 169--182.Google ScholarCross Ref
- Jin, G. Z., & Leslie, P. (2003). The effect of information on product quality: Evidence from restaurant hygiene grade cards. The Quarterly Journal of Economics, 118(2), 409--451.Google ScholarCross Ref
- Jin, G., & Leslie, P. (2009). Reputational Incentives for Restaurant Hygiene. American Economic Journal: Microeconomics, 1(1), 237--267.Google ScholarCross Ref
- Keller, G. (2011). Brownian Motion and Normally Distributed Beliefs.Google Scholar
- Lizzeri, A. (1999). Information revelation and certification intermediaries. The RAND Journal of Economics, 214--231.Google Scholar
- Leland, H. E. (1979). Quacks, lemons, and licensing: A theory of minimum quality standards. The Journal of Political Economy, 87(6), 1328--1346.Google ScholarCross Ref
- Luehrman, T. A. (1998). Strategy as a portfolio of real options. Harvard business review, 76, 89--101.Google Scholar
- Mathis, J., McAndrews, J., & Rochet, J. C. (2009). Rating the raters: are reputation concerns powerful enough to discipline rating agencies'. Journal of Monetary Economics, 56(5), 657--674.Google ScholarCross Ref
- Morrison, A., & White, L. (2004). Financial liberalisation and capital regulation in open economies.Google Scholar
- Myslive'ek, J. (2008). Comparing Certification and Self-regulation. CERGE-EI Working Paper Series, (361).Google Scholar
- Ottaviani, M., & Sørensen, P. (2006). Reputational cheap talk. RAND Journal of Economics, 37(1), 155--175.Google ScholarCross Ref
- Panzar, J. C., & Savage, I. (2011). Does a Minimum Quality Standard Always Reduce the Price of High Quality Products'. The BE Journal of Economic Analysis & Policy, 11(1).Google Scholar
- Reiss, D. J. (2005). Subprime Standardization: How Rating Agencies Allow Predatory Lending to Flourish in the Secondary Mortgage Market. bepress Legal Series, 764.Google Scholar
- Salminen, P. (1988). On the first hitting time and the last exit time for a Brownian motion to/from a moving boundary. Advances in applied probability, 411--426.Google Scholar
- Siegmund, D. (1986). Boundary Crossing Probabilities and Statistical Applications. The Annals of Statistics, 40(2), 361--404.Google ScholarCross Ref
- Shapiro, C. (1983). Premiums for high quality products as returns to reputations. The Quarterly Journal of Economics, 98(4), 659--679.Google ScholarCross Ref
- Stolper, A. (2009). Regulation of credit rating agencies. Journal of Banking & Finance, 33(7), 1266--1273.Google ScholarCross Ref
- Strausz, R. (2005). Honest certification and the threat of capture. International Journal of Industrial Organization, 23(1), 45--62.Google ScholarCross Ref
- Stahl, K., & Strausz, R. (2011). Who should pay for certification'.Google Scholar
- Wang, L., & Pötzelberger, K. (1997). Boundary crossing probability for Brownian motion and general boundaries. Journal of Applied Probability, 54--65.Google ScholarCross Ref
- White, L. J. (2010). Markets: The credit rating agencies. The Journal of Economic Perspectives, 24(2), 211--226.Google ScholarCross Ref
- Xiao, M. (2010). Is quality accreditation effective' Evidence from the childcare market. International Journal of Industrial Organization, 28(6), 708--721.Google ScholarCross Ref
Index Terms
- A dynamic model of certification and reputation
Recommendations
The Invisible Hand of Dynamic Market Pricing
EC '16: Proceedings of the 2016 ACM Conference on Economics and ComputationWalrasian prices, if they exist, have the property that one can assign every buyer some bundle in her demand set, such that the resulting assignment will maximize social welfare. Unfortunately, this assumes carefully breaking ties amongst different ...
Comments