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Abstract
We analyze the impact of the effectiveness of internal regulation for the
development of internal and export markets for credence goods, focusing on food
products, particularly for a developing country which is an exporter (or a potential
exporter). In the model, since goods of actual different quality can be sold as high
quality goods, expected quality is a function of consumers’ beliefs about the effectiveness of regulation. Foreign consumers, who cannot observe foreign regulation as closely as domestic ones, may partly base their expectations on the level of development of the exporting country. Low effectiveness, negative stereotype and low consumers’ trust may cause a failure in the market for high quality, and there may be a
trap of underdevelopment and no high quality exports. The main policy implications
are that increasing the effectiveness of regulation improves export prospects; standard setting and enforcement by external actors, such as supermarkets, or NGOs in the
case of certain niche markets, is likely to be beneficial.