That's News to Me! Information Revelation in Professional Certification Markets

Abstract

This study uses field experiments to investigate empirically the informational role of professional certifiers. We explore a certification market that has evolved in such a manner that provides a unique opportunity to measure the information provision of a monopolist certifier and that of subsequent entrants. Empirical results suggest that the certification industry plays a dual role: it reduces the information asymmetry between informed and uninformed parties and generates new information to all market players. Interestingly, the second role isn't conspicuous until the certification market becomes competitive, as the monopolist certifier credibly distinguishes lemons from non-lemons for the uninformed party, but adds little information to experienced agents. On the contrary, new entrants adopt more precise signals and use finer grading cutoffs to differentiate from the incumbent. Our measured differentiated grading cutoffs map consistently into prevailing market prices, suggesting that the market recognizes differences across multiple grading criteria.