The Informational Properties of Institutions: An Experimental Study of Persistence in Markets with Certification

Institutions that form to reduce moral hazard often eliminate discretion and pool the actions of heterogeneous agents. An unintended consequence of this pooling is that agents' types cannot be determined by their actions. While in the short run such mechanisms may be optimal, in the long run ineffcient institutions may persist because information about changes in the environment is lost. This paper studies a market with a moral hazard reducing certification technology. When certification is adopted, information embedded in market primitives is eliminated. This leads to the persistence of certification, an ineffcient institution that makes all participants weakly worse off.