Journal
AMERICAN JOURNAL OF AGRICULTURAL ECONOMICS
Volume 98, Issue 5, Pages 1432-1449Publisher
OXFORD UNIV PRESS INC
DOI: 10.1093/ajae/aaw039
Keywords
Public standard; private standard; product quality; entry/exit; welfare
Categories
Funding
- Fonds Quebecois de Recherche sur la Societe et la Culture
- Farm Credit Canada
- European Union [290693 FOODSECURE]
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We study the impact that mimimum quality standards have on industry structure, trade, and welfare when firms can develop their own private standard with a higher quality than the public standard. We introduce vertical differentiation in a firm-based trade model in which firms differ in terms of their productivity and non-cooperatively select the quality and price of their product. A higher public standard increases prices set by constrained and unconstrained firms, but the effect on firms' output is generally ambiguous for both types of firms. The most productive firms raise their private standard and enjoy higher profits at the expense of less productive firms. A public standard can increase welfare, especially when there is a high concentration of low productivity domestic firms because of a better allocation of resources.
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