We study firm's incentives to build and maintain reputation for quality, when quality is persistent and can be certified at a cost. We characterize all reputation-dependent MPEs. They vary in frequency of certification and payoffs. Low payoffs arise in equilibria because of over-certification traps. We contrast the MPEs with the highest payoff equilibria. Industry certification standards can help firms coordinate on such good equilibria. The optimal equilibria allow firms to maintain high quality forever, once it is reached for the first time. They are either lenient or harsh, endowing firms with multiple or one chance to improve and certify quality.
Marinovic, Iván, Andrzej Skrzypacz, and Felipe Varas.
"Dynamic Certification and Reputation for Quality."
American Economic Journal: Microeconomics,
Firm Behavior: Theory
Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection
Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
Oligopoly and Other Imperfect Markets
Information and Product Quality; Standardization and Compatibility