Technical regulations and standards for food exports: trust and the credence goods problem

Credence goods, such as organic and fair-trade foods, gain importance in food trade as consumers increasingly demand product attributes that depend on the production process but cannot be verified even after consumption. The effectiveness of the regulatory system governing the labelling of credence goods and its perception by consumers are critical to the development of their markets. The model shows that low effectiveness of regulation and prejudice may cause a failure in the market for high quality goods and a decrease in exports. Countries with a low level of development may remain trapped in the production of low quality goods. For a developing country exporter, obtaining certification against a standard that is accepted in its export market may be a solution to the national prejudice problem. However, the outcome will depend on the extent to which consumers trust the standard and its monitoring system, and on the balance between the costs and benefits of certification. In the long run, pursuing the international harmonization of standards and monitoring systems may be a better strategy.