Fear of Rejection? Tiered Certification and Transparency

Abstract

Product quality certifiers may not reveal the identity of unsuccessful applicants/sellers for three reasons. First, they respond to the desire of individual sellers to avoid the stigma from rejection. Second, nontransparency helps a certifier to increase his market power by raising the stigma from lower-tier certification. Third, transparency does not help screen among heterogeneous sellers. Strategic complementarities arise as sellers move down the certification pecking order and lead to the stigmatization of the lower tiers. Mandating transparency benefits the sellers but has an ambiguous impact on buyers, who actually become less informed about product quality.

The Credit Ratings Game

“…Farhi, Lerner, and Tirole (2010) are interested in how certifiers such as rating agencies or academic journals position themselves with respect to the transparency and coarseness of their certifications. While they allow for heterogeneity among certifiers, they set aside reputation effects and the incentives to produce generous ratings or certifications.…”

Did Subjectivity Play a Role in CDO Credit Ratings?

“…4 4 This recent but growing body of work includes: Bolton, Freixas, and Shapiro (2009), Damiano, Li, and Suen (2008), Farhi, Lerner, and Tirole (2011), Mathis, McAndrews, and Rochet (2009), Opp, Opp, and Harris (2010), Skreta and Veldkamp (2009), Sangiorgi and Spatt (2010), and Bar‐Isaac and Shapiro (2011). …”

Patent Quality and a Two‐Tiered Patent System

“…The study by Farhi, Lerner and Tirole [] is relevant to ours in its examination of tiered certification. In their paper, sellers (analogous to innovators in our model) want to be rated highly.…”

“…Farhi et al . 's [] paper investigates the questions of transparency (e.g., should failure to be certified be revealed?) and the coarseness of rating.…”

“…Our innovators' surplus is similar to the concept of ‘sellers' welfare’ used by Farhi et al . [] in their analysis of markets for certifications. In the context of a patent race, Grossman and Shapiro [] examined the effects of policy changes on the industry's expected profits and stated conditions under which industry profits measure welfare.…”