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 in versely related to ex-ante monitoring costs of the organization, as we ll as the number of members. This self-regulatory outcome is compared to statutory price and quality regulation. Without informational asymm etries between market participants and the social planer, self-regulat ory outcomes can always be replicated by statutory regulation, Even wi th asymmetric information, self regulation is socially desirable only if the regulator values firm's profits sufficiently highly.