We show that, even when the firm and the consumers have same beliefs about the product safety there are incentives for the firm to seek safety certification.
The main analysis investigates the role of consumer moral hazard and shows that it can lead to greater incentives for voluntary certification when inherent product safety and effort are substitutes, but smaller incentives when they are complements.
Only the agent observes whether a firm is a good fit.
Corruption arises due to the agent’s incentive to select a non-deserving firm in exchange for bribes.
The analysis of consumer moral hazard provides a nuanced perspective on the so-called risk-compensation or the “Peltzman effect” phenomenon which postulates higher levels of accident for safer products.
In our paper, products that are successfully certified can end up with higher incidence of accidents.
We consider a setting in which a buyer (a firm or government) seeks to purchase a good through a corruptible agent.
Supplier firms that may or may not be a good fit compete to be selected by the agent.
The expert is impurely altruistic in that she cares about both the client’s utility and her own reputational payoff that depends on the peer perception about her diagnostic ability.
The decision of whether to perform the test, which is costly for the client, provides the expert with an opportunity to influence that perception.