Two-Sided Reputation in Certification Markets

Abstract

In a market where sellers solicit certification to overcome adverse selection, we show that the profit of a monopolistic certifier is hump-shaped in his reputation for accuracy: a higher accuracy attracts high-quality sellers but sometimes repels low-quality sellers. As a consequence, reputational concerns may induce the certifier to reduce information quality, thus depressing welfare. The entry of another certifier impacts reputational incentives: when sellers can only solicit one certifier, competition plays a disciplining role and the region where reputation is bad shrinks. Conversely, this region expands when sellers can hold multiple certifications.