Dynamic Certification and Reputation for Quality
- American Economic Journal: Microeconomics (Forthcoming)
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.
Forthcoming Article Downloads