QUACKS, LEMONS, AND SELF-REGULATION - A WELFARE ANALYSIS

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.