International Strategic Choice of Minimum Quality Standards and Welfare

Abstract:
This article looks at the influence of minimum quality standards in a two-region partial-equilibrium model of vertical product differentiation and trade. Three alternative standard-setting arrangements are considered: full harmonization, national treatment and mutual recognition. The analysis integrates the choice of a particular standard-setting alternative by governments into the model. The article provides a set of sufficient conditions for which mutual recognition emerges as one regulatory alternative that always improves welfare in both regions. Mutual recognition, being the default procedure if governments do not reach a unanimous decision, is the only possible equilibrium of the game.