PUBLIC CERTIFICATION AND OPTIMAL LEVEL OF QUALITY STANDARD

Abstract

This paper analyzes public certification program where the government sets a quality standard and provides labels to sellers whose qualities are above the standard. Buyers are uninformed of sellers’ qualities without the program. We study an optimal level of quality standard or optimal ratio of labeling that maximizes the social welfare. We find that the optimal quality standard becomes higher or the optimal ratio of labeling decreases as the unit certification cost increases and the quality spread grows. We also examine two public certification programs. One is mandatory and the other is voluntary. We find that the social welfare under the mandatory program is higher than under the voluntary program if and only if the unit certification cost is sufficiently small and the quality spread is sufficiently large.