Imperfect information, Effectiveness of Regulation and Trade: High quality Credence Goods and Developing Exporters

The paper provides a broad framework of analysis for the relationship between imperfect information on goods’ quality, regulation and trade and presents a model on the relationship between internal regulation on quality and credence goods exports, focusing on developing exporters. In the model expected quality is a function of consumers’ beliefs about the effectiveness of regulation. Foreign consumers, who cannot observe regulation as closely as domestic ones, may partly base their expectations on the level of development of the exporting country , as a proxy for the effectiveness of its regulation of product quality. Low effectiveness and low consumers’ trust may cause a failure in the market for high quality, and there may be a trap of underdevelopment and no high quality exports. The policy implications are that increasing the effectiveness of regulation improves export prospects and pursuing the harmonization of standards is a better strategy than mutual recognition, since the latter does not address the trust problem between countries with vastly different income levels. NGOs have a role, since when the standard on a credence attribute is established and monitored by separate, non national, entities the national stereotype problem may be bypassed.