Classification Societies - The limits of reputation to reduce average quality pricing: A proposal for a rating based classification system - A legal economic perspective

Abstract

This paper reviews, first, if the reputation tool is adequate to avoid average quality pricing of classification services and analyses whether the current system is sufficient to signal the market the actual condition of vessels at the time of the survey. Second, the paper discusses a perhaps slightly progressive and certainly politically controversial proposal: Does a rating based classification system provide a more accurate mechanism to disclose the condition of vessels, to compare the methods of the different classification rules, and, through this, to reduce the risk of average quality pricing of class services? A key finding of the paper is that, indeed, reputation plays a significant role to disclose the actual condition of vessels. But existing asymmetric information may weaken the constraint to issue accurate class certificates, if competitive pressure inclines class societies to profit from inaccurate class services.