Private certification may better achieve regulatory goals than governments and regulatory agencies.
Private certification as a means of risk regulation and quality assurance is widespread. The 2001 Directory of U.S. Private Sector Product Certification Programs lists 180 U.S.-based nongovernmental organizations that certify more than 850 types of products. These private entities provide assurance that the products they certify meet criteria specified by professional associations, standards organizations, and government agencies. Private certification also extends to professional services and institutions. Consumers count on private certification when they purchase goods and services; companies rely on it when obtaining inputs and choosing suppliers; and government agencies use it to assess regulatory compliance. Private certification has developed into an industry in its own right, complete with trade associations and professional and accreditation standards.
In many instances, private certification transcends limits that hamper government regulation. Key to private certification’s success is market demand: industries that resist government oversight are often willing to pay for private certification to enhance the value of their products and services. Moreover, while government frequently lacks resources to develop, implement, and enforce regulations, private certification can generate fees to cover these costs.
Unfortunately, private certification is not always reliable. Market competition among certifiers sometimes leads them to lower their standards in order to reduce the cost of services and ease the demands that they place on clients. For example, following the financial crisis, a congressional panel accused credit rating agencies of issuing favorable assessments of mortgage-backed securities that proved to be worthless. In another notorious example, a private food safety auditing firm awarded the Peanut Corporation of America a “superior” rating shortly before the company’s products caused a nationwide salmonella outbreak that killed nine people and sickened over 22,000.
Reliable private certification must harnesses market demand for certification without succumbing to competitive pressures to cut corners. Two prominent examples of successful private certification are fire safety certification by the Underwriters Laboratories, whose well-known UL symbol appears on more than 20,000 different types of products made by 69,000 manufacturers, and kosher certification by the Orthodox Union, whose OU symbol appears on roughly half of all packaged goods in a typical American supermarket. When it works, reliable private certification has a number of advantages over government regulation.
One advantage of private certification is greater technical expertise. In product safety, private certifiers typically have superior technical knowledge of particular products and their commercial use. Indeed, government regulators frequently rely on private standards to give their own regulations more credibility. Sometimes government regulations modify a private standard; often, they simply incorporate it by reference.
Private certification often provides better inspection and monitoring coverage of regulated entities. For government regulators, inspection and monitoring strain agency budgets. For private certifiers, however, inspection and monitoring generate fees. The income received from inspection services prompts UL to inspect facilities at least four times per year, far beyond that of most government programs. Similarly, kosher certification agencies have strong financial incentives to expand their inspection and monitoring activities, while government kosher inspection in the only two states that provide it — New York and New Jersey — has been drastically curtailed due to budget cuts. Aside from incentives, private certifiers face fewer obstacles to monitoring and enforcement. They are not limited by local, state, or national jurisdictional boundaries, making it possible for them to more easily provide on-site inspection nationally and globally.
Government agencies could, theoretically, charge fees for inspection and monitoring. Indeed, government routinely charges fees for services such as permitting and licensing, but proposals to charge regulated entities fees for inspection and monitoring typically face stiff political resistance. Moreover, government fees are designed merely to cover costs. Private fees typically cover more than costs, and this revenue is invested in expansion.
Private certification is often more proactive and prospective than government regulation. Private product-safety certifiers typically take action in anticipation of problems, whereas government regulation is generally more reactive. For example, private kosher certifiers actively seek out problems before they affect consumers and set new policies to avoid trouble later. By contrast, state officials are merely reactive to complaints about kosher fraud, and they typically wait to intervene until a major scandal attracts widespread public attention.
Private certification can be more responsive to both regulated industries and consumers. Legislative and administrative rulemaking processes are slow and frequently take years to produce results. Moreover, once government regulators establish standards, they are unlikely to revise them. By contrast, private standard setting agencies routinely review and, if necessary, revise their standards in light of industry experience and complaints by consumers.
Regulation by private certification facilitates cooperation by regulated entities. Within ongoing private agency-client relationships, manufacturers are eager to satisfy the demands of certifiers upon whom they rely for the marketability of their products. Electrical equipment and consumer product manufacturers need UL or some equivalent certification to compete with other manufacturers, and food companies rely on kosher certifiers for access to the kosher market. Consequently, companies see private agencies more as marketing partners than police.
Private certification is often more efficient than government regulation. Competition among certifiers provides an incentive to cut costs to keep fees as low as possible while still maintaining sufficiently high standards to protect the brand value of their services. By relying primarily on informal sanctions — such as the refusal to certify — private certifiers do not incur the costs associated with passing legislation, making administrative rules, and pursuing enforcement actions in the courts. In addition, since private certifiers are motivated to regulate in part by industry demand, they are less likely than government regulators to develop standards whose costs to industry outweigh their benefit to consumers. There is, of course, no market demand for such standards among regulated industries.
In highlighting the advantages of reliable private certification over government regulation, one should be careful not to oversimplify the variety of possible relationships between them. Sometimes, private certification fills a void where government is unwilling or unable to regulate; other times it fills gaps in an area where government regulation operates but is not comprehensive. Private certification may complement or compete with government regulation. The two may be mutually reinforcing or redundant. Moreover, the relationship between them may change over time. In matters of regulatory design, the most important question may not be whether to promote either private certification or government regulation, but rather how to most effectively combine them.
This essay is excerpted from the author’s recent article, “Competitive Third-Party Regulation: How Private Certification Can Overcome Constraints That Frustrate Government Regulation,” published in Theoretical Inquiries in Law. Citations have been omitted.