Imperfect Certification

This paper proposes a model of imperfect certification in which a certifier’s testing technology only assures that whenever two products are tested the higher quality product is more likely to pass than the lower quality one. Such a certification service gives rise to a signaling type game. It is found the certifier can be completely bypassed in a Perfect Bayesian Equilibrium leaving such a certificate meaningless. A belief-based equilibrium refinement is effective in selecting partially separating equilibria in which the expected quality of a certified product increases in certification fee. An imperfect certification service improves product market efficiency but does not completely resolve information asymmetry. In a duopolistic certification market, interestingly, it is the higher fee certifier who generally has an advantage.

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Enrico Pennings

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