Voluntary Standards, Certification and Labeling Systems: Enhancing Efficiency Through Trade of Entitlements

Tracey Michelle Roberts, Louis D. Brandeis School of Law

10/25/2011
(Original Publish Date: 9/27/2011)

Voluntary standards, private certification and labeling mechanisms are one of many forms of private governance institutions that have proliferated in recent years to permit communities to govern without government. They arise when individuals and organizations undertake collective action to reduce the negative social and environmental impacts associated with a globalized economy. The article addresses two key questions: "What do these systems do?" and "Why do they arise?" First, the article argues that voluntary standards, certification and labeling systems are "Rule 4" institutions, systems that permit parties to exchange entitlements. Drawing from Calabresi and Melamed's seminal article, "Property Rules, Liability Rules and Inalienability Rules: One View of the Cathedral", the article explains how voluntary standards, certification and labeling systems permit consumers to correct the misallocation of entitlements by lowering the steep transaction costs that arise in global trade, including costs associated with finding willing buyers and sellers, costs associated with negotiating trades between geographically remote parties and costs associated with ascertaining the quality of credence goods. VSCL systems enhance efficiency by internalizing externalized social costs and by meeting consumer preferences associated with risk. Second, the article reveals that voluntary standards, certification and labeling systems are developed primarily in contexts marked by common pool resource dynamics. This includes both situations in which natural resources may be overharvested and are likely to suffer the 'tragedy of the commons' if no intervention occurs, and situations in which the resource at stake is regulation itself and regulatory fragmentation and race to the bottom dynamics disincentivize regulatory action. To the extent that goods labeled under VSCL programs comprise an ever larger market share and have begun to be incorporated into local, state and federal law, they may signal that a tipping point has been reached and an overhaul of existing law to change the original allocation of entitlements is in order.