Tuesday, 14.01.2020 – Informing The Public by Withholding Information

Link of the day: Coarse Grades: Informing the Public by Withholding Information (paper)

Certificates and test results e.g. for safety, environmental or ethical standards often follow a very simple pass/fail system. Instead of saying “Company X has a sustainability score of 73.9” we usually just see that company X has passed the test or has an environmentally friendly label. This might seem a bit odd, considering that the people who do the certification want to provide as much information as possible and almost always even use more much more precise scores internally to derive their results. The paper offers an explanation: Companies incur costs from the certification process and usually have to voluntarily opt-in. Only giving pass / fail grades increases incentives to undergo the certification process. First, companies that do ok, but not perfect avoid the risk of getting a “barely passed the minimum requirements”-certificate. Second, the fact that mediocre companies are mixed with really good ones means that the average company that passed the certification is probably quite good. This makes a certificate attractive for companies that aren’t perfect. The authors argue further that the increased participation that is incentivized from the coarse pass/fail instead of a finer grading schemes leads to more information given to the public.

On an interesting side point, they also observe that grading schemes tend to be much finer whenever the company graded doesn’t have to agree to the evaluation. On Amazon and similar platforms, product quality is examined much more rigorously and more detailed results are displayed.

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