The Welfare Consequences of Certified Labeling for Credence Attributes

Certified labeling for credence attributes is examined using the concepts of pooled and separating equilibria. The analysis addresses a latent credence good demand that differs from a conventional good demand by willingness to pay for the credence characteristic. Third-party certified labeling vertically differentiates the two products and a two separate markets replace a single pooled market. Market outcomes are examined theoretically and with empirical simulations. Costless labeling is net welfare improving, but impacts are highly asymmetric. Credence producers gain largely at the expense of conventional producers. Costly labeling may reduce welfare even with rather modest labeling costs