Certification as Solution to the Asymmetric Information Problem

This chapter provides an overview of the economic theory of certification as a solution to the informational problems of experience and credence goods. It starts with a non-technical presentation of the basic economic model of certification based on a paper by Kip Viscusi and then dwells on its variations: If one acknowledges that certifiers themselves produce an experience or credence good, it becomes obvious that certifiers are susceptible to the same temptations to hide or even falsify information as the producers of the underlying experience or credence goods. Certification of only a minimum quality is shown to be a possible market equilibrium with negative effects on the spread of qualities offered on the market. Heterogeneity of consumer preferences is reported as one of the sources that may increase information asymmetries between consumers and the certification agencies in the model. Finally, the chapter takes a brief look at the structure of the market for certifiers.