Article ID Journal Published Year Pages File Type
7351324 European Economic Review 2018 63 Pages PDF
Abstract
We analyze a certification intermediary's incentives to distort ratings in a model with a monopolistic profit maximizing certification intermediary, a continuum of heterogeneous sellers, and a competitive market of risk-neutral buyers. The value of a seller's good is known to the seller and observable by the certifier, but not by buyers. Sellers can choose to get a rating. The certification intermediary can reveal a signal of arbitrary precision about the quality of the good. In contrast to the existing literature, we allow aggregate uncertainty. As in the existing literature, one rating class is optimal. However, the certification intermediary does not generally choose a socially optimal cutoff: the certifier is more likelyto be too lenient if the distribution of aggregate uncertainty has a lower mean, a higher variance, and is more left skewed. It is more likely to be too strict if the opposite holds.
Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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