This study uses field experiments to investigate empirically the informational role of professional certifiers. We explore a certification market that has evolved in such a manner that provides a unique opportunity to measure the information provision of a monopolist certifier and that of subsequent entrants. Empirical results suggest that the certification industry plays a dual role: it reduces the information asymmetry between informed and uninformed parties and generates new information to all market players. Interestingly, the second role isn’t conspicuous until the certification market becomes competitive, as the monopolist certifier credibly distinguishes lemons from non-lemons for the uninformed party, but adds little information to experienced agents. On the contrary, new entrants adopt more precise signals and use finer grading cutoffs to differentiate from the incumbent. Our measured differentiated grading cutoffs map consistently into prevailing market prices, suggesting that the market recognizes differences across multiple grading criteria.
One frequent (and legitimate) criticism of economics is that it never finds anything we don’t know anyways and when it does, it takes years to “conclusively” find it. A lot of the economics of education literature seems to suffer from the latter problem, but not the former because the problems are complex enough that it can find some unexpected results; although it hasn’t produced any comparative advantages (I swear I once read a discussion by a prominent economist where he claimed that Ricardo’s theory of comparative advantage is the best example in the field of economics that is both not obvious and true, although I can’t find it). This is where a lot of experimental economics literature breaks with the rest of the field, producing really interesting and thought provoking stuff that is empirically robust (although it does have plenty of its own problems).