The rapid expansion in the number of accredited hospitals justifies inquiry into the motives of hospitals in seeking accreditation and its social effectiveness. This paper presents a simple decision-theoretic framework where cost reductions and improved quality of care represent the endpoint benefits from accreditation. We argue that hospital accreditation, although acting as a market-signaling device, might be a socially inefficient institution. First, there is at present no convincing evidence for accreditation causing output quality improvements. Second, hospitals could seek accreditation, even though doing so is socially inefficient, because of moral hazard, consumer misperceptions, and nonprofit motivations. Finally, hospitals that seek accreditation need not themselves believe in output quality improvements from accreditation. Consequently, while awaiting additional evidence on accreditation, policy makers and third-party payers should exercise caution in encouraging such programs. Copyright © 2014 John Wiley & Sons, Ltd.