The Impacts of Labeling on the Production and Trade of Vertically Differentiated Goods with Process Attributes

A model of vertical quality differentiation is used to analyze the introduction of continuous and binary labeling in a market for credence goods with process attributes under autarky and free trade. The results indicate that continuous labeling increases welfare under autarky and free trade so long as labeling is not too expensive. With binary labeling, consumer welfare is increased if the standard is set above the level that would be chosen under continuous labeling under autarky. In the case of free trade, the effects depend on whether binary labeling is harmonized or whether there is mutual recognition of different standards.