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Test Design and Minimum Standards

Author

Listed:
  • Peter M. DeMarzo
  • Ilan Kremer
  • Andrzej Skrzypacz

Abstract

We analyze test design and certification standards when an uninformed seller has the option to generate and disclose costly information regarding asset quality. We characterize equilibria by a minimum principle: the test and disclosure policy are chosen to minimize the asset's value conditional on nondisclosure. Thus, when sellers choose the information provided, simple pass/fail certification tests are likely to dominate the market. A social planner could raise informational and allocative efficiency, and lower deadweight testing costs, by raising the certification standard. Monopolist certifiers also satisfy the minimum principle but set a higher standard and reduce testing rates to maximize revenue.

Suggested Citation

  • Peter M. DeMarzo & Ilan Kremer & Andrzej Skrzypacz, 2019. "Test Design and Minimum Standards," American Economic Review, American Economic Association, vol. 109(6), pages 2173-2207, June.
    • Handle: RePEc:aea:aecrev:v:109:y:2019:i:6:p:2173-2207
    Note: DOI: 10.1257/aer.20171722
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    Citations

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    Cited by:

    1. Li, Run, 2022. "Full revelation of expertise before disclosure," Economics Letters, Elsevier, vol. 221(C).
    2. Andreas A. Haupt & Nicole Immorlica & Brendan Lucier, 2023. "Certification Design for a Competitive Market," Papers 2301.13449, arXiv.org.
    3. Lichtig, Avi & Weksler, Ran, 2023. "Information transmission in voluntary disclosure games," Journal of Economic Theory, Elsevier, vol. 210(C).
    4. Tsz-Ning Wong & Lily Ling Yang & Andrey Zhukov, 2024. "Optimal Disclosure Mandate in Supply Chains," CRC TR 224 Discussion Paper Series crctr224_2024_560, University of Bonn and University of Mannheim, Germany.
    5. Ian Ball & Deniz Kattwinkel, 2019. "Probabilistic Verification in Mechanism Design," Papers 1908.05556, arXiv.org, revised Jul 2024.
    6. Bowen, T. Renee & Galperti, Simone & Dmitriev, Danil, 2021. "Learning from Shared News: When Abundant Information Leads to Belief Polarization," CEPR Discussion Papers 15789, C.E.P.R. Discussion Papers.
    7. Tsz-Ning Wong & Lily Ling Yang & Andrey Zhukov, 2024. "Optimal Disclosure Mandate in Supply Chains," UB School of Economics Working Papers 2024/468, University of Barcelona School of Economics.

    More about this item

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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