Mandatory vs. Voluntary Certification: Investment, Quality, and Information Asymmetry

Abstract

Global sourcing has made quality management a more challenging task. While most foreign suppliers voluntarily certify their products, the Consumer Product Safety Commission (CPSC) requested 187 product recalls in 2007 and is proposing stricter mandatory certification. This paper analyzes the economic consequences of mandatory and voluntary certification. We demonstrate that mandatory certification may discourage efficient suppliers from improving product quality, thereby leading to potential supply chain inefficiency and welfare loss. Voluntary certification may mitigate the problem, but poor quality products, albeit sold at low prices, may still be made available to consumers. Surprisingly, we found that it can be optimal to subsidize inefficient suppliers with uncertain certification in order to alleviate the under-investment problem under mandatory certification.