Jurisdictional Competition For Quality Standards : Competition of Laxity?
Regulatory competition arises where governments mutually accept quality standards in a common market. In a recent paper Hans-Werner Sinn claims that regulatory competition will be subject to market failure and lead to "competition of laxity” in a sense that only the lowest possible quality standards survive regulatory competition. In this paper it is shown that these results do not need to follow when some fairly restrictive assumptions of Sinn’s model are relaxed. First, if his assumption of a large number of small jurisdictions is given up in favor of the assumption that a small number of larger jurisdictions compete for quality standards, then the resulting quality standards will end up above the minimum level, albeit still below an efficient level. If no subsidies are allowed in order to compensate for losses of producers working under strict quality standards, quality standards will generally converge to the level of the jurisdiction with the lowest quality preferences, but not below this level. Another assumption of Sinn is that governmental quality standards cannot better be judged by consumers than product qualities by producers. If this assumption is relaxed, regulatory competition may even be superior to a harmonized quality standard.