Comparing Certification and Self-regulation

Jan Myslivecek

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: I compare certification and self-regulation, two widely used quality assurance mechanisms in markets where consumers do not observe the quality of goods. Certification is a mechanism in which an external firm oers a certificate to producers who undergo a testing procedure, issues the certificate if they meet the certifier's standards and collects the certification fee. Self-regulation is a mechanism in which a club of firms in the industry adhere (or not) to a self-imposed code of conduct and benefit from the club's reputation. I show that if the testing technology is perfect and costless, the choice of standards and fees by the certifying organization (CO) is welfare inferior, while the self-regulatory organization (SRO) chooses a welfare optimal fee, and I identify conditions under which the SRO also chooses optimal standards. If the testing technology is costly and imperfect, this result is not necessarily valid and depends on the dierence between the costs of the testing technology available to the CO and SRO.

Keywords: Quality assurance; asymmetry of information; certication; self-regulation. (search for similar items in EconPapers)
JEL-codes: D02 D45 D71 D72 D82 L14 L15 L21 L38 L43 L51 (search for similar items in EconPapers)
Date: 2008-09
New Economics Papers: this item is included in nep-cta and nep-reg
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