Certification Design for a Competitive Market

We consider a market for products with varying but hidden levels of quality. A third-party certifier can provide informative signals about the quality of products and can charge for this service. Sellers choose both the quality of the product they produce and a certification. The products are then sold in a competitive market. Under a single-crossing condition, we show that the levels of certification chosen by sellers are uniquely determined at equilibrium. The certifier's problem is equivalent to a screening problem with non-linear valuations. Certification objectives to maximize gains from trade, quantity traded, and certification revenue are in general incompatible. We prove that optimal menus for these and other objectives satisfy a monotonicity property, and we provide a FPTAS for their computation. We also show that a full, two-sided mechanism can improve over certification only through the possibility of subsidizing certificates. We discuss how to interpret our results in the motivating example of markets for carbon offsets and removal activities.

Full paper: https://arxiv.org/abs/2301.13449