The Rise of Rule Four Institutions: Voluntary Standards, Certification and Labeling Systems

Abstract

Voluntary standards, certification and labeling systems are one of many forms of private governance institutions that have been developed in recent years to permit communities to govern without government. These institutions enhance efficiency by internalizing externalized social costs and by meeting consumer preferences associated with risk. This Article advances the existing literature in four ways. First, drawing from Calabresi and Melamed's seminal article, Property Rules, Liability Rules and Inalienability Rules: One View of the Cathedral, the Article explains how these institutions are "Rule 4" institutions-they facilitate the trade of entitlements by lowering steep transaction and information costs. Second, the Article observes that these systems are developed primarily in response to government void and government failure and identifies the rules and structures these systems supply to regulate in the absence of government. The institutions pose interesting implications for the Coase-theorem premise that the main obstacle to internalizing externalities through private sector solutions is the lack of properly defined property rights; these institutions have no authority to define or allocate property rights, and yet they facilitate the exchange of entitlements. Third, the Article identifies the strengths and weaknesses of the systems and suggests ways to support them. Finally, the Article suggests that where governments have adopted voluntary standards, certification and labeling systems to counteract their own allocation of entitlements, an overhaul of existing law to change the original allocation may be in order.

Navigating the myriad of corporate quality standards: a CSR and stakeholder perspective

“…This emphasis on voluntary standards over laws reflects a widespread political reluctance to enact or enforce new regulations. The requirements for governmental speed and responsiveness, a greater focus on government efficiency, and reduced level of governmental funding and support are increasingly key motivators in adopting QS as a preferred method over laws to achieve broad-based social goals (Roberts, 2013). These trends related to government involvement in QS have significant implications for CSR-related QS, particularly for organizations that are trying to navigate the QSs landscape to serve their constituencies more effectively.…”

Bank compliance with national transaction account standards: Evidence from a mid‐western metropolitan area

“…Voluntary codes are codes of practice that can influence, shape, or set benchmarks for behavior in the marketplace (Al‐Baluchi, 2006; Pearson & Seyfang, 2001). Voluntary standards do not hold any force of law or regulation, and are sometimes developed in response to government inaction (Roberts, 2013). They are designed to be applied in a consistent manner to create a consistent outcome (Muir, 2016), and sometimes standardization in the relevant market (Wymeersch, 2008).…”

“…Providing public, easy‐to‐locate information about their product features and the degree to which they adhere to the voluntary code serves tells consumers that a company's product meets certain standards. This information signals a commitment to consumers and the industry that the company positively contributes to addressing pressing social issues (Roberts, 2013), and that they are promoting the public interest, which increases confidence in their product (Potts, 2015). Adherence to voluntary codes and public information about their products relative to the code can bolster their strategic reputational risk management by improving their public image, provide feedback on consumer preferences and needs, and possibly increase their business.…”