On Accuracy of Third Party Audits
نویسندگان
چکیده
Third party audits of product quality — such as consumer product reviews, financial audits, and court decisions — are common. Prior economic analysis finds that more accurate assessments improve welfare, either by facilitating better consumer choices or encouraging producers to improve quality. This paper shows that, when auditors have binding capacity constraints, information available to consumers and thus welfare is maximized by less than perfectly accurate audits, specifically by audits that mistakenly give high grades to bad types. Capacity constraints ensure that not all good types can obtain an audit, preventing unraveling. False positives encourage bad types to submit to an audit hoping to get mistakenly favorable assessments.
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