Quality Signaling through Certification

This paper analyzes the problem raised by quality provision in globalizing economies. When quality is a credence attribute, there is a signaling problem and quality drops to its minimum level. A way out of this under-provision equilibrium consists to rely on certification. However certification of goods involves costs, most of which are fixed, because to credibly signal quality, the certification process has to be carry out by an independent authority above all suspicion. The certification costs, which might justify a centralized intervention, become a major force in deciding market structure. Then in a given population the rate of certification depends on the consumers' wealth and size. If the population is too poor the market for certification collapses unless it is publicly funded. This analysis implies that at a national level certification should be an increasing function of GDP/capita and population size under laissez-faire. It should be higher under voluntary public certification. We evaluate the empirical relevance of the theory based on a statistical preview made on the economics of seed certification.