The New Palgrave Dictionary of Economics Online

Trade among states with diverse regulatory systems creates the possibility of taking advantage of the cost differentials in production that result. However, it is increasingly clear that what happens in one jurisdiction affects policy in other jurisdictions. It is often argued that this creates a ‘race to the bottom’ effect, where the most lax regulation gains an advantage, but the evidence on this is mixed, at best, and there is a plausible argument too for a ‘race to the top’ effect, where states set high regulatory standards as a barrier to entry.