Dynamic Certification and Reputation for Quality

We study a firm's incentives to build and maintain reputation for quality, when quality is persistent and can be certified at a cost. We characterize all Markov-perfect equilibria where the firm's choices -i.e., timing of certification and investment– depend only on the firm's reputation. MPE vary in frequency of certification and payoffs, but are generally characterized by low payoffs and over-certification traps. We contrast the MPEs with the highest-payoff PBE equilibria. We interpret that industry certification standards help firms coordinate on more efficient equilibria. The optimal standard al- lows firms to maintain high quality forever, once it is reached for the first time, and it can be either lenient or harsh - endowing firms with multiple or one chance to improve and certify quality