A Note on "Lemons" Markets with Quality Certification

Abstract

In markets with qualitative uncertainty, pricing on the basis of average quality will be unattractive to participants whose products are above average in quality. This note examines the possibility of quality certification as an alternative to exit from the market in such situations. Examples dealing with labor market uncertainties illustrate the economic properties of the quality certification process, which unravels from the top down. The economic motivations and patterns of this form of price discrimination are similar to those encountered in standard "lemons" models.

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