An Empirical Examination of Quality Certification in a "Lemons Market"

This article examines the effect third‐party certification has on a market characterized by adverse selection. Using an original data set from the market for young thoroughbreds, we show that certification alleviates problems of adverse selection by examining the effect certification has on breeder...

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Bibliographic Details
Published in:Economic inquiry 2003-04, Vol.41 (2), p.279-291
Main Authors: Wimmer, Bradley S., Chezum, Brian
Format: Article
Language:English
Subjects:
Adverse selection
Certification
Datasets
Decision making
Earnings
Economic conditions
Economic models
Economic theory
Economics
Horse racing
Horses
Imperfect information
Market failure
Market prices
Nominations
Prices
Pricing
Quality control
Quality standards
Sales
Studies
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Summary:This article examines the effect third‐party certification has on a market characterized by adverse selection. Using an original data set from the market for young thoroughbreds, we show that certification alleviates problems of adverse selection by examining the effect certification has on breeder decisions to retain or sell horses and the effect these decisions have on observed prices. Data on the racetrack performance of the horses confirm the results.
ISSN:0095-2583
1465-7295
DOI:10.1093/ei/cbg007