Certification as a Viable Quality Assurance Mechanism: Theory and Suggestive Evidence

In this paper we address an asymmetric information problem in the fundraising industry, the fundraising problem. The problem arises from donors’ lack of information about the quality of charities that solicit donations. We focus on one particular solution of this problem, certification, where an independent agency provides a costly signal, a certificate, to charities that can use it to signal their ‘high’ quality. Our model is a signaling game involving three types of player: donors, charities and a certifier. We compare the decisions and impact of two types of certifier: one profit maximizing and one nonprofit. The assumptions of our model are derived from stylized facts that we distilled from certification systems currently existing in the fundraising industries of some European countries. While the current manuscript is meant to inform the real-world design and implementation of such a system in the Czech Republic and other transition economies, our work complements the literature on certification and provides results that are different from those reported up to now.