FUNDAMENTAL STANDARDS AND TIME CONSISTENCY

Recent literature showed that government intervention is important to overcome market failures in the choice of standards. This paper shows that even benevolent and well-informed governments may be unable to ov ercome such market failures if fundamental standards are concerned. Co sts and benefits of changes in fundamental standards are asymmetricall y distributed over generations. Intergenerational coordination aimed a t changing a current standard will fail because of a time consistency problem. With a simple model and several examples from the history of conventions, we discuss the conditions that might help overcome the ti me inconsistency in standard changing policies.