“Certification, Reputation and Entry: An Empirical Analysis” by Dr. Xiang HUI
Dr. Xiang HUI
MIT Sloan School of Management
MIT Initiative on the Digital Economy
More precise information about past performance of incumbent firms has implications for entry decisions and affects the quality distribution of firms in the market. However, this relationship has not been well studied empirically because of limited data. We exploit a policy change on eBay as a quasi-experiment, in which the eBay-Top-Rated-Seller badge substituted the previous Powerseller badge, by making the requirements more stringent. This change results in some incumbent sellers losing their badge, implying that the average quality of both certified and uncertified sellers increases. We exploit the differential impact
of the policy on different sub-categories for identification. First, we document a negative correlation between the number of entrants and the share of badged sellers across categories. We find that after the policy change, categories that experience a higher reduction in the share of badged sellers have a larger number of entrants. However, this difference tends to disappear once the market adjusts to the new equilibrium after about six months. Second, we find that the distribution of quality provided by entrants has changed and has fatter tails. This is consistent with the prediction that entrants from the extremes of the quality distribution have stronger incentives to enter, although it could be due to similar entrants changing their behavior. Third, we find almost no change on the quality provided by incumbents. This last finding suggests that the increase in the quality provided by
entrants at the tails is more likely to come from improved selection rather than from a change in entrants behavior. The results have implications for the design of reputation and certification mechanisms in electronic and other markets.
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