Anno Stolper: The Credibility of Certifiers

It is often argued that certifiers have an incentive to offer inflated certificates, although they deny it. In this paper, we study a model in which a certifier is paid by sellers, and may offer them inflated certificates, but incurs costs if doing so. We find that the certifier may face a commitment problem: The certifier offers inflated certificates if the costs of offering the first inflated certificate are lower than the sellers’ willingness-topay for it. However, in equilibrium, the buyers cannot be fooled. The certifier would hence make a higher profit if the certifier did not offer inflated certificates and the buyers believed it. The number of inflated certificates, which the certifier offers in equilibrium, depends on the costs of offering inflated certificates. Yet, the certifier may oppose an increase in the costs of offering inflated certificates. We show that whether a certifier welcomes tighter regulation or lobbies against it, may depend on whether the new regulation only imposes higher costs, or also reduces the certifier’s commitment problem significantly. JEL classification: C72; D82; G24; L15; M42