Abstract
This paper provides a framework in which suppliers of experience goods may find it in their best interests to provide, and enforce, quality standards. The incentives to form self-regulatory organizations are inversely related to ex-ante monitoring costs of the organization, as well as the number of members. This self-regulatory outcome is compared to statutory price and quality regulation. Without informational asymmetries between market participants and the social planer, self-regulatory outcomes can always be replicated by statutory regulation. Even with asymmetric information, self regulation is socially desirable only if the regulator values firm's profits sufficiently highly.
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We would like to thank Niklaus Blattner, V.V. Chari, Stuart Greenbaum, Martin Hellwig, Pierre Regibeau, and two anonymous referees for very helpful comments. Financial support of the Schweizerischer Nationalfonds and the Deutsche Forschungsgemeinschaft are gratefully acknowledged.
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Gehrig, T., Jost, P.J. Quacks, lemons, and self regulation: A welfare analysis. J Regul Econ 7, 309–325 (1995). https://doi.org/10.1007/BF01067100
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DOI: https://doi.org/10.1007/BF01067100