Second-Order Benefits from Standards

Abstract

This Article contributes to the new governance literature by analyzing how private parties profit from standards. Scholars previously have focused on what I call "first-order" profits from the right to extract rent directly from the ownership or application of standards. But some parties also make "second-order" indirect profits by engaging in some new enterprise not directly related to the value of the relevant standard. For example, an accounting firm can offer lucrative consulting services based on its reputation as a standard hearer. Second-order profits are most substantial for strong form standards, which arise when the government designates a private entity as standard setter and assigns it the task of enforcement and regulation. This Article suggests that the question of whether such privatization is beneficial depends not only on First-order rents, but also on second-order costs and benefits. It considers two examples from the financial markets: over-the-counter derivatives and credit rating agencies.