Jurisdictional Competition for Quality Standards: Competition of Laxity?
Regulatory competition arises where governments mutually accept quality standards in a common market. It has been claimed 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. First, if not a large number of small jurisdictions but a small number of large 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 by 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. A second argument against a competition of laxity result is that quality standards of governments may be better judged by consumers than product qualities by producers. As far as this is the case, regulatory competition may even be superior to a harmonized quality standard.