We thank several seminar audiences, two anonymous referees, and Judith Chevalier for helpful comments. The US National Science Foundation (NSF grant no. 0830288, “Patent Pools and Biomedical Innovation”) and Harvard Business School's Division of Support provided financial support. Farhi and Tirole acknowledge funding from the European Research Council under the European Community's Seventh Framework Programme (FP7/2007-2013) grant agreement no. 249429. All errors and omissions are our own.
Fear of rejection? Tiered certification and transparency
Version of Record online: 21 FEB 2014
© 2014, RAND.
The RAND Journal of Economics
Volume 44, Issue 4, pages 610–631, Winter 2013
How to Cite
Farhi, E., Lerner, J. and Tirole, J. (2013), Fear of rejection? Tiered certification and transparency. The RAND Journal of Economics, 44: 610–631. doi: 10.1111/1756-2171.12033
- Issue online: 21 FEB 2014
- Version of Record online: 21 FEB 2014
- US National Science Foundation. Grant Number: 0830288
- Patent Pools and Biomedical Innovation
- European Research Council. Grant Numbers: FP7/2007-2013, 249429
Product quality certifiers may not reveal the identity of unsuccessful applicants/sellers for three reasons. First, they respond to the desire of individual sellers to avoid the stigma from rejection. Second, nontransparency helps a certifier to increase his market power by raising the stigma from lower-tier certification. Third, transparency does not help screen among heterogeneous sellers. Strategic complementarities arise as sellers move down the certification pecking order and lead to the stigmatization of the lower tiers. Mandating transparency benefits the sellers but has an ambiguous impact on buyers, who actually become less informed about product quality.