Certification and Market Transparency

We provide elementary insights into the effectiveness of certification to increase market transparency. In a market with opaque product quality, sellers use certification as a signaling device, while buyers use it as an inspection device. This difference alone implies that seller-certification yields more transparency and higher social welfare. Under buyer-certification profit maximizing certifiers further limit transparency, but because seller-certification yields larger profits, active regulation concerning the mode of certification is not needed. These findings are robust and widely applicable to, for instance, patents, automotive parts, and financial products. JEL Classification Numbers: D82, G24, L15.