American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Test Design and Minimum Standards
American Economic Review
vol. 109,
no. 6, June 2019
(pp. 2173–2207)
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.Citation
DeMarzo, Peter M., Ilan Kremer, and Andrzej Skrzypacz. 2019. "Test Design and Minimum Standards." American Economic Review 109 (6): 2173–2207. DOI: 10.1257/aer.20171722Additional Materials
JEL Classification
- D42 Market Structure, Pricing, and Design: Monopoly
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- L12 Monopoly; Monopolization Strategies
- L15 Information and Product Quality; Standardization and Compatibility