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.