Test design and minimum standards

Peter M. DeMarzo, Ilan Kremer, Andrzej Skrzypacz

Research output: Contribution to journalArticlepeer-review

14 Scopus citations

Abstract

We analyze test design and certification standards when an uninformed seller has the option to generate and disclose costly information regarding asset quality. We characterize equilibria by a minimum principle: the test and disclosure policy are chosen to minimize the asset's value conditional on nondisclosure. Thus, when sellers choose the information provided, simple pass/fail certification tests are likely to dominate the market. A social planner could raise informational and allocative efficiency, and lower deadweight testing costs, by raising the certification standard. Monopolist certifiers also satisfy the minimum principle but set a higher standard and reduce testing rates to maximize revenue.

Original languageAmerican English
Pages (from-to)2173-2207
Number of pages35
JournalAmerican Economic Review
Volume109
Issue number6
DOIs
StatePublished - Jun 2019

Bibliographical note

Publisher Copyright:
© 2019 American Economic Association. All rights reserved.

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