The certifier for the long run

Abstract

We build a workhorse model to study the optimal and the equilibrium certifier from a long-run perspective. Firms enter the market, and invest in their capacity to provide qual- ity, before the certification threshold is determined. With a certifier that cares about qual- ity and externalities (such as an NGO), the threshold is demanding and the firms’ profits are small. Anticipating this, only a few firms enter the market, and they invest heavily. With a certifier mostly concerned with the firms’ profits (such as an industry association), the results are reversed. The relative importance of externalities, investments, and entry determines the socially optimal certifier identity as well as the type of certifier that is most likely to operate in equilibrium. The theory’s predictions are empirically testable and shed light on the variety of certifiers across markets and over time.