Mandatory vs. Voluntary Certification: Investment, Quality, and Information Asymmetry

32 Pages Posted: 27 Jul 2008

See all articles by Ying-Ju Chen

Ying-Ju Chen

Hong Kong University of Science & Technology (HKUST) - Department of Information Systems, Business Statistics and Operations Management

Mingcherng Deng

City University of New York (CUNY) - Baruch College

Date Written: July 25, 2008

Abstract

Global sourcing has made quality management a more challenging task. While most foreign suppliers voluntarily certify their products, the Consumer Product Safety Commission (CPSC) requested 187 product recalls in 2007 and is proposing stricter mandatory certification. This paper analyzes the economic consequences of mandatory and voluntary certification. We demonstrate that mandatory certification may discourage efficient suppliers from improving product quality, thereby leading to potential supply chain inefficiency and welfare loss. Voluntary certification may mitigate the problem, but poor quality products, albeit sold at low prices, may still be made available to consumers. Surprisingly, we found that it can be optimal to subsidize inefficient suppliers with uncertain certification in order to alleviate the under-investment problem under mandatory certification.

Keywords: certification, quality, outsourcing, information asymmetry, supply chain

JEL Classification: L15, M11, L14,

Suggested Citation

Chen, Ying-Ju and Deng, Mingcherng, Mandatory vs. Voluntary Certification: Investment, Quality, and Information Asymmetry (July 25, 2008). AAA 2009 Management Accounting Section (MAS) Meeting Paper, Available at SSRN: https://ssrn.com/abstract=1177023 or http://dx.doi.org/10.2139/ssrn.1177023

Ying-Ju Chen

Hong Kong University of Science & Technology (HKUST) - Department of Information Systems, Business Statistics and Operations Management ( email )

Clear Water Bay
Kowloon
Hong Kong

Mingcherng Deng (Contact Author)

City University of New York (CUNY) - Baruch College ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
173
Abstract Views
918
Rank
136,104
PlumX Metrics