Imprecise information disclosure and truthful certification

This article studies the interaction of information disclosure and reputational concerns in certification markets. We argue that by revealing information less precisely, a certifier reduces the threat of capture because this reduces her gains from selling fraudulent certificates. As a result, only imprecise disclosure rules are implementable for intermediate discount factors. Our results therefore suggest that contrary to the common view, imprecise disclosure may be socially desirable. Regulatory intervention may provoke market failure especially in industries where certifier reputational rents are low.