An Empirical Examination of Quality Certification in a "Lemons Market"

This article examines the effect third-party certification has on a market characterized by adverse selection. Using an original data set from the market for young thoroughbreds, we show that certification alleviates problems of adverse selection by examining the effect certification has on breeder decisions to retain or sell horses and the effect these decisions have on observed prices. Data on the racetrack performance of the horses confirm the results.