The Credibility of Certification

Abstract

Certification is meant to solve the adverse selection problem raised by unsubstantiated claims from firms about environmental safety. Things are getting complicated by the suspicion of uninformed consumers that the certification agency might manipulate their beliefs. To make her certification credible, a government agency must prove she is not opportunist. This entails a signaling cost: certification fees for green firms must be distorted upward relative to the Ramsey benchmark level. Certification is shown to be credible only if the agency's cost of collecting information is sufficiently high. Otherwise, fees are pooling brown and green firms and certification discloses no information.

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