Does an information service provider improve the market?

Abstract

This study aims to theoretically analyze whether the information service provider improves the market efficiency. We construct a model where a good supplied by a producer has a risk to be harmful for a consumer because of an accident and it brings monetary losses to both consumers and producers. The accident risk is endogenously determined by the efforts of producers and consumers and the information of safety provided by the producers. The information service provider requires producers to provide information and certifies the credibility of information. In the equilibrium, if the entry cost for the information service provider is small, the optimal effort levels spent by the consumer and producer increase and the risk of accident decreases, which improves the market efficiency.