Credence Good Labeling: The Efficiency and Distributional Implications of Several Policy Approaches

Abstract

Abstract A model of vertical product differentiation is used to analyze the labeling of credence goods, focusing on the manner by which quality is communicated. The results indicate that firms prefer private labeling options. In addition, firms may hire private certifiers as well as paying for mandated government labels when the government's quality benchmark substantially deviates from firms' private quality choices. The average consumer prefers a mandatory, discrete label with a high‐quality standard while poor consumers prefer a mandatory, discrete label with a low standard.