Raising the Bar: Certification Thresholds and Market Outcomes

Abstract

Certification of sellers by trusted third parties helps alleviate information asymmetries in markets, yet little is known about the impact of a certification’s threshold on market outcomes. Exploiting a policy change on eBay, we study how a more selective certification threshold affects the distribution of quality and incumbent behavior. We develop a stylized model that shows how changes in selectivity change the distribution of quality and prices in markets. Using rich data from hundreds of online categories on eBay.com , we find support for the model’s hypotheses. Our results help inform the design of certification selectivity in electronic and other markets. (JEL D82, L11, L15, L86)