Test Design and Minimum Standards
- (pp. 2173-2207)
AbstractWe 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.
CitationDeMarzo, Peter M., Ilan Kremer, and Andrzej Skrzypacz. 2019. "Test Design and Minimum Standards." American Economic Review, 109 (6): 2173-2207. DOI: 10.1257/aer.20171722
- 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