TY - JOUR
T1 - Test design and minimum standards
AU - DeMarzo, Peter M.
AU - Kremer, Ilan
AU - Skrzypacz, Andrzej
N1 - Publisher Copyright:
© 2019 American Economic Association. All rights reserved.
PY - 2019/6
Y1 - 2019/6
N2 - 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.
AB - 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.
UR - http://www.scopus.com/inward/record.url?scp=85066493049&partnerID=8YFLogxK
U2 - 10.1257/aer.20171722
DO - 10.1257/aer.20171722
M3 - ???researchoutput.researchoutputtypes.contributiontojournal.article???
AN - SCOPUS:85066493049
SN - 0002-8282
VL - 109
SP - 2173
EP - 2207
JO - American Economic Review
JF - American Economic Review
IS - 6
ER -