597

Rare Coin Grading: A Case ofMarket-Based Regulation

John M. Cobin

This article draws on and expands my earlier empirical study of therare coin grading industry (Cobin 1997). Major additional contribu-tions are to (1) show the significant and important changes in the mar-ket during the last two decades (different firms, improved services,and greater competition); (2) add important and essential informationthat was missing or unknown due to innovations that have occurredin a now much more mature market; (3) vastly improve the tableswith more data and comparative statistics that support the case formarket regulation; and (4) provide details of the historical develop-ment of the industry. This updated study confirms that the industryprovides high-quality, market-based regulation at low cost for themultibillion-dollar rare coin marketplace. Ease of entry has have per-mitted dozens of firms to compete, forcing the current 13 survivors toimprove quality. Prices for the best firms’ services remain low eventhough higher than in 1994 because of quality improvements. As aresult, a strong case can be made for replacing government “publicinterest” regulation with more efficient market-based regulation,which emerges spontaneously to satisfy consumer demand.

Government versus Market RegulationMany studies have appeared in the last few decades that suggest

that government-enforced codes and regulations often fail to improve

Cato Journal, Vol. 34, No. 3 (Fall 2014). Copyright © Cato Institute. All rightsreserved.

John M. Cobin is Professor of Political Economy at the Swiss ManagementCenter University in Zug.

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safety and quality. Without a market test, there can be no assurancethat the benefits of regulation exceed its costs. Government regula-tors face different incentives than private ones, which actually impelthem to be inclined to overlook infractions. Public choice problemsrelating to inefficient institutions, rent seeking, regulatory capture,and perverse incentives—as well as the knowledge problem—preclude government regulation from being effective in producinghigher levels of safety and quality (Holcombe 1995).

Politicians and bureaucrats who implement public goods programsare always constrained by such public choice impediments. Whengovernment fails—that is, provides less net welfare (considering thecost of taxes and public inconvenience) than what can be obtainedthrough market forces—there is no longer any justification to con-tinue its regulatory activities. However, when private interests can beserved indirectly through a regulatory apparatus to reduce competi-tion, damage competitors, and force consumers to buy their products,an incentive is created to find some public interest purpose that canprovide the needed justification (Cobin 2014: 190–92). If, at the sametime, politicians and especially bureaucrats can benefit from such dis-guised private interest regulation—through larger status-enhancingbudgets, greater job security, more power, and indirect perks—theywill have an even stronger incentive to regulate (Niskanen 1971,1994; Simmons 2011). In the last several decades, the economics lit-erature has called into question the notion that bureaucrats will workto serve the public interest. As Nobel laureate James M. Buchanan(1991: 37) stated, “The mythology of the faceless bureaucrat follow-ing orders from above, executing but not making policy choices, andmotivated only to forward the ‘public interest,’ was not able to survivethe logical onslaught” from public choice theory.

In an attempt to find a remedy for government failure, at least inthe arena of regulation and planning, a literature has evolved thatpromotes the idea of market-based regulation (e.g., Alger and Toman1990; Blundell and Robinson 2000; Cobin 1997, 2013a, 2013b,2013c; O’Driscoll and Hoskins 2006; Poole 1982; Benson 1989). Thisarticle provides a case study of grading and evaluating in the rare coinindustry that tests the hypothesis of this literature: When competitionand concern for reputation are present, markets will spontaneouslyemerge to efficiently regulate the quality of goods and provide con-sumers with essential information (De Alessi and Staaf 1994, Klein1997, Komhauser 1983, Shapiro 1983).

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Under normal circumstances, there is no reason to believe thatmarket provision will fail. Certain services might be under-suppliedif people who do not pay for them can benefit from them. However,the existence of positive externalities does not necessarily precludemarket provision. This article builds on the evidence from my studyof the rare coin industry and helps determine whether quality assur-ance is a public good that should be provided by government ormerely a private good that can be provided by the market.

Savas (1982) has argued that government is wasteful and substan-tial privatization is in order. Likewise, Schmidtz (1991) has made thecase that private enforcement mechanisms like “the assurance con-tract” or other voluntary solutions might be used to replace govern-ment’s role in public goods production, because the free-riderproblem cannot justify coercion. In his view, “government is itself animposer of negative externalities” (Schmidtz 1991: 89). Foldvary(1993) points out that (1) the nonprovision of a public good becomesa public bad, (2) determining the optimal provision of a public goodis a highly problematic process, and (3) governments are unlikely torelinquish power voluntarily.

There is theoretical support for the privatization of public services.Government enterprises have higher costs of production (Lindsay1976); private airlines are more efficient and productive than theirpublic counterparts (Davies 1971); and inefficient state-owned cop-per mines do far worse than privately owned mines (Villagrán andVermeo 2013). Surely, the last 50 years is replete with examples ofpublic enterprises that are less efficient than private ones. If decision-makers have neither an ownership interest in their organization nordirect accountability to the owners, then both the organization anddecisions will be subject to perverse incentives and distortedresource allocation.

Market failures are cited as the main justification for governmentintervention. However, the articles in Cowen’s (1988) compendium,The Theory of Market Failure, strongly suggest that the theory ofmarket failure has theoretical and empirical shortcomings.Externality and free-rider theory is particularly questionable (seee.g., the essays by Brubaker, Buchanan and Dahlman, Demsetz,Goldin, and Tiebout in Cowen 1988). Indeed, many important casestudies that provide empirical critiques of market failure theory showthat alleged cases of public goods can be provided by markets. Theseinclude Coase (1974) and Mixon (1992) on lighthouses, Cheung

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(1988) on the interaction between bees and apple blossoms in honeyproduction, Poole (1982, 1988) and Cobin (1997, 2013a, 2013b,2013c) on fire safety, and High and Ellig (1988) on the provision ofeducation in the United States and Great Britain. Therefore, many ofthe goods and services often considered to have a public nature maybe provided by markets. As de Jasay (1989) notes, it is also possiblethat the incidence of public goods in modem economies has beenexaggerated, leaving room for efficiency improvements by policiesthat commend market alternatives. He argues that voluntary partici-pation in collective action often is consistent with self-interest.

Holcombe (1995) and Sowell (1996) extend Austrian economicinsights by Mises and Hayek about knowledge to show that govern-ment provision of collective or public goods will not be efficient. Ifplanners were omniscient, then they might be able to plan effectively.However, they are not omniscient (even as a committee) and are thuswholly incapable of planning either effectively or efficiently—no mat-ter how altruistic they might be. Moreover, it may not simply beassumed that regulations actually accomplish what they are intendedto do because of public choice problems, including agencies having anatural inclination to favor the industries they regulate. The problemsof inadequate knowledge, perverse incentives, and inefficient institu-tions must be taken seriously when evaluating public provision of pri-vate goods.

The studies already noted have shown that consumers can be pro-tected without government regulation. O’Driscoll and Hoskins(2006) provide additional cases of private regulatory alternatives thatwork well: free banking (without a central bank or its regulation), cur-rency emission, arbitration and customary law, brand name genera-tion, approval seals like Good Housekeeping, and quality certifierslike Dun & Bradstreet and Underwriters Laboratories. More of suchinstitutions would exist, except that the government crowds themout. As Holcombe (1995: 103–4) writes, “With this illusion of a gov-ernment umbrella protecting everyone from harm, there is relativelylittle public demand for private regulation.”

It is evident that consumers are not entirely satisfied with gov-ernmental information generating services. The existence of insti-tutions like the Underwriters Laboratories, founded in 1894 byinsurers to provide risk data, and the Hearst Empire’s GoodHousekeeping seal of approval, a magazine marketing approachused from 1910 to the present day, are market mechanisms that

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augment the standard-setting and regulatory infrastructure.However, the former has a tacit connection with governmentthrough its entwinement with the state’s regulatory apparatus andby potentially providing assistance for manufacturers that seek gov-ernment privileges, while the latter is more of a marketing tech-nique than a serious quality-certifying firm—making both of thempoor examples of market-based regulation. Alternatively, the sportscard (Dobrow 2014) and gemstone (Cobin 1997: 105–6) gradingand certification services are good examples of market-based regu-lation. However, they are not as impressive or mature as the rarecoin industry, which provides the best case to date of pure market-based regulation.

Consumers want to know more than just basic characteristicsabout an expensive product or service. They want to know somethingabout comparative and prevailing quality (and thus value), given thelarge capital outlay involved. In spite of the fact that much may begleaned from considering Good Housekeeping and UnderwritersLaboratories from the standpoint of certification, neither of them aregrading firms. In addition, it is not clear that they are suitable exam-ples of certification services that would develop without governmentregulation of safety or quality. It is possible that, because of its privi-leged position, Underwriters Laboratories is not being continuallyhoned by the competition that would exist without government reg-ulation of building quality. Moreover, because of the nature of gov-ernment regulation, it is not clear that they efficiently transmit thelowest cost to consumers. Without rigorous competition, which isalso rivalry for reputation, there can be no certainty that standardswill be set optimally, that is, without serving private interests of a sin-gle firm or industry that is resting on political privilege.

Quality Grading Services in the Rare Coin Industry:A Clear Case of Market Regulation

Because a market framework with wholly market-based institu-tions is vastly different from a government-regulated one, it is appro-priate to consider only the most market-based institutions that haveemerged to alleviate imperfect information, in this case those in therare coin industry. Given the absence of government regulation andthe demand for grading and certification services for rare coins, mar-kets have spontaneously generated institutions to meet consumer

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needs. The rare coin industry is a lucid example of a market-regula-tory institution. It serves a vibrant and large market (Milburn 2013),where a single coin can sell for several million dollars, and has gener-ated many billions of dollars in annual sales (excluding unreportedtransactions), with trading in hundreds of mintages.

Rare coins have become a strong investment alternative, partlybecause of their precious metal content (“realness”). According toAllard (1990: 279), returns on rare coin investments exceeded 15 per-cent annually on average from 1970–90, and rare coin sales skyrock-eted to nearly $1 billion annually by the late 1980s. Today salesexceed $10 billion, according to CoinTrackers website. Although rarecoin prices do not always rise, they always warrant quality certifica-tion because the price differentials between grades are so large.Indeed, at the “proof” level, even a slightly different grade can dou-ble a coin’s price, or more than double it in the case of the highestgrades. The bottom line is that the rare coin market is fluid, dynamic,often pricey, and a single step in grade can make a big difference inprice. Quality grading is of paramount importance to both the sellerand especially the buyer.

Rare coin grading and certification requires great skill and knowl-edge, and specialists can expect to earn salaries in excess of $200,000per year (Cobin 1997: 96). Moreover, just as information leading tobuilding grading and certification services can be viewed as a publicgood, rare coin grading and authenticating could be considered asproviding a public benefit. Potentially, the information might be con-sidered a public good because consumption is nonrival and excludingthose who do not pay for the services would be difficult. Rare coinshops face this reality because anyone walking by can see the gradeof the coin; online auction services face it as well.

The potential free-rider problem in rare coin grading and certify-ing arises since someone is receiving an external benefit without pay-ing for it. That is, many shoppers benefit from better informationbeing displayed by graded and certified rare coins, but the only onewho actually pays for it is the buyer, not the shoppers.

In fact, markets for private grading and certification (information)services help circumvent the free-rider problem because graded andcertified coins command a premium, allowing rare coin dealers tocapture the benefits through giving information to every potentialbuyer. Moreover, since each rare coin is unique, it is possible to gradeone without grading them all, making the grading and certification of

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Rare Coin Grading

a particular rare coin an excludable service. Hence, rare coin ownersand sellers have an incentive to give away grade and certificationinformation, much like advertising.

The Rare Coin Certification IndustryGovernments are not the only institutions that provide certifica-

tion and grading services. The market has also met demand for suchservices in many industries, including the rare coin industry. It isclear enough, on account of the existence of private inspectors andcertification firms which are employed by lenders, insurance compa-nies, and consumers, that private industry could provide market reg-ulatory alternatives that alleviate negative externalities and improveknowledge (although they are ancillary to the government regulatoryprocess). The ensuing subsections demonstrate that even withouthaving a government grading service in place, the market for rarecoins has generated an alternative to government quality certificationthat alleviates both imperfect information and externality problems.It shows that when consumers demand such services, the market isable to provide them.

Coin Grading Schemes, Certification Firms, and Reputation

The U. S. government has minted coins since 1793, using variousmetals and sundry denominations (Cook, Cribb, and Carradice1990). Collecting American coins has evolved from a hobbyist’s fas-cination to a lucrative investment activity. Indeed, rare coins havebeen one of the top-performing investments in the last severaldecades, with some Wall Street firms even developing limited part-nership interests in rare coin portfolios and a rare coin index to trackthe market (Allard 1990, Milburn 2013).

Since 1986, the industry has generally accepted a system in whichuncirculated coins are graded by one of many independent organiza-tions that assign numerical standards based on appearance. The U.S.system established by the American Numismatic Association, asdescribed in Table 1, is the most widely used.

The rare coin industry provides a lucid example of how the freemarket handles the demand for grading services. Prior to the 20thcentury, all coins were simply graded as either “new” or “used”(Ruddy 1995: 5). Today, rare coins are valued according to both theirrarity and their grade. “Proof” (PR or PF) refers to the method of

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Rare Coin Grading

manufacture and the condition is usually perfect uncirculated.Uncirculated levels above “borderline or brilliant uncirculated” (BU)are also referred to as “mint states” (MS). A corresponding numeri-cal ranking system now predominates, with the lower grades of coinsbeing assigned numbers from 1 to 49, and “about uncirculated”(AU), BU, and MS grades of coins receiving numbers from 50 to 70(Yeoman 1994: 5).1 The technique for grading coins was standardizedby the end of the 20th century (Halperin 1990), which has provideda means for markets to identify the rarest and most valuable coins.According to the Professional Coin Grading Services (PCGS) web-site, there are 15 very rare, graded U.S. coins worth between$4.5 million and $15 million each.

Grades of 60 to 70 are reserved for a “perfectly preserved coin”(Allard 1990: 279). In general, other than perhaps a handful of excep-tionally rare coins, only coins with grades of BU or MS-60 to MS-67are actively traded as investments. Sometimes a _ symbol will beadded to the grade to indicate that it is close to another level. Highergrades from MS-68 to MS-70 are extremely rare or do not exist formost collectible, nonbullion coins.

Coins with AU grades are often purchased as substitutes for goldor silver, not having a significant premium over the value of theirmetal content. Nonetheless, they do have some collectable value andprovide insurance against confiscation by government because theyare a coin rather than just hunks of gold or silver (holding gold wasdeclared illegal by President Franklin D. Roosevelt in 1933 for all butjewelers, dentists, collectors, and miners).

A coin’s grade is affected by authenticity, luster, strike, color, ton-ing, friction, coin or die flaws, and obverse/reverse grade consolida-tion (Martin 2008). Rare coins are slabbed—that is, encapsulated bygrading firms into acrylic holders to protect the coins—and theirgrade is certified in the encasement. Typically, the encasement alsoindicates the name of the grading firm and the type of coin encapsu-lated. The grade is invalidated if the encasement is tampered with.Daily market quotations are available for slabbed coins. Thus, deal-ers of rare coins are enabled to trade more productively with theincreased knowledge, as well as reliability and verifiability, generatedby this market process (Allard 1990: 279).

1There is also the Sheldon numerical system of grading, from which poor, veryfair, BU and Gem classes are derived (Ruddy 1995: 112).

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Dealers and consumers benefit from the existence of numerousnewsletters, reports, catalogs, and pricing guides, which provide con-tributive analyses and recommendations (Allard 1990: 284–85).These publications include the Coin Street Journal, Coinage,COINfidential Report, Coins, ANS Newsletter, The Numismatist,Numismatic News, Coin World, COINage Magazine, and WorldCoin News. Services provided by rare coin grading and certificationfirms include grading, authentication, photo certification, encapsula-tion, and low-cost, comprehensive insurance (Cook, Cribb, andCarradice 1990: 7). Table 2 gives the names and locations of themajor firms in North America, Europe, and Asia that provide someor all of these considerable and specialized services. The percentagecolumns in Table 3 reflect the average percentage of “sheet price”paid for a coin by dealers when the coin purchased is unseen—thatis, when it is ordered by telephone or the Internet. The percentagemeasures the relative confidence that dealers have in the slabbingfirm’s ability to grade a coin correctly; it is an excellent proxy for rep-utation. A higher percentage translates into a better reputation rela-tive to market competitors. Thus, the typical buyer can easily assessthe value of the information produced by a particular firm. A higherpercentage suggests that a firm is reliable and, subsequently, trans-lates into greater market share.

Benefits of Low-Cost, Competitive, Innovative GradingServices and Products

Inexperienced buyers can now purchase coins that have beengraded and authenticated by third-party services to assure the qual-ity of each item, and there is more written information available forbeginners than ever before. The pricing of rare coins is also verycompetitive in today’s open market where profit margins are oftenlower than in the past. In addition to the benefits, the industry hasdone a credible job of upgrading the quality of services provided bycoin dealers through organizations and associations that promotestrong professional conduct and ethics (Yeoman 1994: 6). The indus-try is large and competition is fierce in North America, Europe, andAsia. While the preeminent firms’ market positions have changed lit-tle in the last 19 years, most firms have lost some prestige, indicatingthe value the market places on coin grading service quality.

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Of course, the greysheet percentages vary widely, and that dynamismgives consumers prices and up-to-the-minute information on howinformed decisionmakers view the grading services. The percentagesmight also reflect concern in the market over the unchecked exis-tence of counterfeit slabs, against which firms have had to raise tech-nological capability that preclude falsification. Newcomer NTCclaims that it has been creating a niche market by offering acounterfeit-proof service, but the firm provided me with no specialevidence to support the claim. Nonetheless, the issue is one ofincreasing relevance to collectors.

Furthermore, the fact that there are eight American competi-tors, three or four of which are doing well, suggests that there areno substantial barriers to entry and thus little evidence of monop-olization from the pre-1990s firms: ANACS, PCGS, and NGC.PCGS has graded over 27 million coins since its inception in 1986,with a market value of nearly $30 billion. NGC has graded over

TABLE 3Top U.S. Coin Grading Firms’ Reputation Ratings

Greysheet Ratinga

PercentageFirm November 12, 1994 November 29, 2013 Change

PCGS 98 83.1 –15.2NGC 89 82.9 –6.9ICG n/a 65.7ANACS 74 65.2 –11.9PCI/DGS 84 52.1 –38.0SEGS n/a 47.6NCI 42 42.5 _1.2INS 43 34.0 –20.9

aAverage percentage of “sheet price” paid for an unseen coin, with a rangeof ±15 percent for the four better firms, and as much as ±32 percent forthe others. The “greysheet” is jargon for a price list of slabbed and “raw”coins found in the Coin Dealer Newsletter. There is also a “bluesheet” forunseen slabbed coins only, without return privilege.Source: Coin Dealer Newsletter.

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Cato Journal

28 million coins since 1987. Together, PCGS and NGC still havemore than one-half of the overall market share (Vousvounis 2013),but all the new competitors with lower prices have eroded themassive market share disparities of the 1990s. In 1994, firms esti-mated industry market share as follows: PCGS had about 60 per-cent, NGC had 35 percent, and all the other firms had 5 percent(Cobin 1997: 104). Now the market has many more participants,and NGC, ICG, and ANACS have all improved their greysheetpositions, with newcomers like SGS and NTC making significantinroads.

The rare coin industry is a vibrant example of fervent competi-tion and resulting industrial organization. The following are illus-trative and suggest that high fixed costs, lack of scale economiesand of established reputation do not prevent firms from enteringthe market: PCI’s entry in 1994, its subsequent merger withHallmark in 1991, changes of ownership in 2001, 2002, 2006,2007, and the DGS takeover of PCI in 2008; SEGS and ICG’sentry in 1998; NCS’s entry in 2001; ACGS’s entry in 2002; CGS’sentry in 2005; and NTC’s re-entry in 2013. Moreover, the morethan two dozen failed entries indicate that the market is quitemature and that newcomers must overcome significant reputationdisadvantages in order to break into the rare coin gradingmarket and survive; trust and reliability are paramount(Vousvounis 2013).2

There are also do-it-yourself or pre-made slabs in circulation,which are really just “shells” that look like the acrylic slabs used byprofessional firms. These shells are commonly seen in the marketand carry names like Coin World, American Coin Club GradingService, Certified Coin Grading Service, International Numismatic

2These failed grading firms include: National Numismatic Certification,TruGrade Service, American Grading Service, American Numismatic Institute,Capitol Coin Grading Service, Digital Coin Grading Service, FiducialSelect Capitol, Hallmark (1987), Independent Grading Service, Millennium CoinCertification Services, North American Numismatic Certification, New StandardCoin Grading Service, NuGrade Service, Numismatic Grading Service, NUMIS-PRO, Premier Certified Coins, Premier Coin Grading and Authentication,Professional Numismatic Grading Service, Professional Grading Service, SilverDollar Grading Service, Twenty-first Century Grading Service, UniversalGrading Service, and United Numismatic Company. These companies, by andlarge, were formed from 2000 to 2006.

611

Rare Coin Grading

Bureau, Original Coin Certifiers, and Liberty Coin GradingService.3

Numerous attempts have been made to enter the certification wingof this multibillion-dollar industry, obviously, because the high volumeof coins to be graded makes for a lucrative business and consumerdemand for services is brisk. Nevertheless, there have been only minorallegations of antitrust violations and collusion in the industry.4 Privatelawsuits are another story. Given the high value of many coins, therehave been a number of significant lawsuits regarding rare coins, andthere are now law firms with practices that specialize in rare coin cases,especially slab counterfeiting or fraud. Thus, coin-grading firms arekeen to stay on top of potential problems (Loftus 2012).

Rates and services vary considerably between firms. Table 4 andTable 5 list prices of the main grading services at the end of 2013.Table 6 provides special slab features offered by some U.S. firms.5

Additionally, most firms offer rush services, substantially increas-ing the grading cost per coin, which may demonstrate how firmsserve consumers that “search for firms with acceptable waits”(De Vany and Saving 1983: 996). At the end of 2013, there were eightmain competitors in the rare coin certification industry in the UnitedStates and perhaps six elsewhere (including multinationals likePCGS, NGC, and NCS).

3Others include United States Grading Service, Certified Rare Coins, CertifiedService, Investment Grade Coins, Colonial Coin Graders, Coin Fixation, FirstStrike Grading, Global Coins Grading Service, Heritage Coin Grading,International Numismatic Certification Service, MS Society D&E Coins,Numismatic Evaluation Service, National Numismatic Grading Service,Professional Coin Graders, Professional North American NumismaticService, Pacific Northwest Graded Coin, Quality Coin Grading & CertificationService, Specialty Coin Grading, Expert Grading Company, Elite NumismaticGrading Service, Investment Grading Service, Hallmark Coin Grading Service,Modern Coin Specialists, Northwest Coin Grader, Professional NumismaticGrading Service, and World Coin Grading, Gallery Grading Company.4See, for example, ASA Accugrade v. American Numismatic Association, et al.,370 F.Supp.2d 213 (2005), U.S. District Court, District of Columbia (www.swcgs.com/ASA_v_ANA.html).5Company websites on December 6, 2013, were: PCGS (www.pcgs.com), NGC(www.ngccoin.com), ICG (www.icgcoin.com), ANACS (www.anacs.com), PCI(www.pcicoins.com), ACCGS (www.accgs.org), SEGS (segscoins.com), SGS(www.stargrading.org), NCS (www.ncscoin.com), NTC (www.ntccoin.com), CGS(www.coingradingservices.co.uk), and CCCS (www.canadianccoincertification.com).Note that ICCS did not have a website when this research was being conducted.

612

Cato Journal

TA

BL

E4

U.S

.Rar

eC

oin

Gra

ding

Serv

ice

Pric

ing

Pric

ing

(U.S

.Dol

lars

)

Stan

dard

(One

Pre-

1965

Gol

dC

oin)

12–1

5B

usin

ess

Day

Nor

mal

Tur

naro

und

Tim

e

Val

ue%

.$2

0,00

0%

.N

ongo

ld$1

00,0

00R

ariti

esw

/oV

alue

Und

erSi

nce

Max

.Val

ueSi

nce

Coi

nsor

Oth

erM

ax.V

alue

with

Lim

it(%

Val

ueC

harg

ed)

Fir

m/C

rite

ria

$3,0

0019

94a

4–5

Day

s19

94b

Eco

nom

yPr

ice

2–3-

day

Rus

han

d/or

One

-day

Serv

ice

PCG

S45

_20

0%65

_33

3%25

125

250

(_1%

)N

GC

30_

100%

60_

300%

1712

560

0IC

Gc

19n/

a25

n/a

1250

90A

NA

CSd

19_

58%

29_

142%

1549

100

PCIe

n/a

n/a

10_

33%

1016

35SE

GSf

1515

1515

15A

CC

GSg

919

924

29N

CSh

30n/

a60

n/a

1710

050

(_3%

–5%

)SG

Si10

1010

1010

NT

Cj

1516

1230

50

a Val

uelim

itw

as$2

,000

in19

94;p

rices

base

don

data

inC

obin

(199

7:T

able

9).O

ne-d

ayru

shse

rvic

eco

st$1

40in

1994

for

PCG

S.b V

alue

limit

was

$5,0

00in

1994

;pric

esba

sed

onda

tain

Cob

in(1

997:

Tab

le9)

.One

-day

rush

serv

ice

cost

$125

in19

94fo

rN

GC

.c F

orIC

G,f

orei

gn(n

on-U

.S.)

coin

sco

st$1

9.O

ne-d

ayse

rvic

efo

ral

lcoi

nsis

$90.

The

two-

day

serv

ice

rate

of$5

0is

only

for

coin

sva

lued

unde

r$1

0,00

0.T

hefiv

e-da

yse

rvic

era

teof

$25

ison

lyfo

rco

ins

valu

edun

der

$7,5

00.T

he10

-day

serv

ice

rate

of$1

9is

only

for

coin

sva

lued

unde

r$5

,000

.The

econ

omy

serv

ice

rate

of$1

2is

only

for

coin

sva

lued

unde

r$5

00.C

oins

over

thes

e

613

Rare Coin Gradingva

lues

will

bech

arge

dth

efu

ll$9

0an

dha

veon

e-da

yse

rvic

e.O

nD

ecem

ber

6,20

13,t

hew

ebsit

ead

vert

ised

asp

ecia

lpric

epr

o-gr

am:i

f10

coin

sw

ere

subm

itted

,the

pric

eof

each

coin

inth

eec

onom

ypr

ogra

mw

ould

bere

duce

dto

$10

and

to$1

5ea

chin

the

10-d

aytu

rnar

ound

prog

ram

.d F

orA

NA

CS,

fore

ign

(non

-U.S

.)co

ins

are

the

sam

epr

ice

buth

ave

nopr

ecise

deliv

ery

time

spec

ified

.One

-day

serv

ice

for

all

coin

sis

$100

;itw

as$5

9in

1994

(see

Cob

in19

97:T

able

9).T

hetw

o-da

yse

rvic

era

teof

$49

ison

lyfo

rco

ins

valu

edun

der

$10,

000.

The

five-

day

serv

ice

rate

of$2

9is

only

for

coin

sva

lued

unde

r$5

,000

.The

15-d

ayse

rvic

era

teof

$19

ison

lyfo

rco

ins

valu

edun

der

$2,0

00.T

heec

onom

yse

rvic

era

teof

$15

($19

fore

ign)

ison

lyfo

rco

ins

valu

edun

der

$500

,has

afiv

e-co

inm

ini-

mum

,and

cann

otbe

gold

coin

s(e

xcep

tfor

eign

).C

oins

over

thes

eva

lues

will

bech

arge

dth

efu

ll$1

00an

dha

veon

e-da

yse

rvic

e.M

oder

nco

ins

(pos

t-19

50)h

ave

afiv

e-co

inm

inim

uman

dco

st$1

0($

12fo

reig

n,m

axim

umva

lue

of$5

00).

e ForP

CI,

add

$15

toth

esta

ted

pric

efo

rfor

eign

(non

-U.S

.)co

ins.

The

$35

pric

eha

snot

hing

todo

with

rarit

yin

this

case

butr

athe

rone

-da

yse

rvic

e.C

oins

valu

edfro

m$1

,000

to$5

,000

pay

anad

ditio

nal$

15,a

ndco

insw

orth

mor

eth

an$5

,000

pay

$20

addi

tiona

l.O

nD

ecem

ber6

,201

3,th

ew

ebsit

ead

verti

sed

asp

ecia

lpric

epr

ogra

m:“

Und

erN

ewM

anag

emen

t.10

Coi

ns!5

Day

s.7

Buc

ksea

.!”f F

orSE

GS,

the

singl

epr

ice

appl

ies

toan

yco

inre

gard

less

ofva

lue,

date

,rar

ity,e

tc.S

EG

Sch

arge

s$5

topr

e-sc

reen

and

grad

eth

eco

in.I

fenc

apsu

latio

nis

desir

edla

ter,

anad

ditio

nalf

eeof

$8is

requ

ired.

The

reis

noex

plan

atio

nas

tow

hyth

e$1

3to

talc

ost

for

this

met

hod

isle

ssth

anor

derin

gth

een

tire

prog

ram

for

$15.

g AC

CG

Son

lyde

signa

tes

pric

etie

rsba

sed

onsp

eed

ofse

rvic

e;no

cons

ider

atio

nis

mad

efo

ra

coin

’sva

lue

orra

rity.

“Dat

edap

prai

sal”

incl

uded

inth

esla

bco

sts

anad

ditio

nal$

2,as

does

“est

imat

edsu

rviv

ing

cens

us”

info

rmat

ion.

“Pho

toce

rtifi

cate

s”co

st$1

0.h N

CS

isa

coin

cons

erva

tion

serv

ice

rela

ted

toN

GC

.Ser

vice

pric

esfo

rsla

bbin

gar

eth

esa

me

asN

GC

’s.T

he“e

valu

atio

n”se

rvic

eco

sts

1pe

rcen

toft

heco

in’s

valu

e($

10m

inim

um).

The

“con

serv

atio

n”st

age

cost

s“4

perc

ento

fdec

lare

dva

lue

upto

$150

,000

per

coin

,2pe

rcen

tofd

ecla

red

valu

eov

er$1

50,0

00pe

rco

in,$

15m

inim

umfe

e,”

acco

rdin

gto

the

com

pany

web

site.

The

reis

a$1

00“w

alkt

hrou

gh”

fee

and

a$5

0“e

xped

ite”

fee.

i The

SGS

web

site

says

that

firm

only

slabs

coin

sw

itha

grad

eof

60to

70.O

ther

sar

ece

rtifi

edan

d/or

retu

rned

:10

perc

entf

or10

–99

coin

s;15

perc

entf

or10

0_.T

hesin

gle

pric

eap

plie

sto

any

coin

rega

rdle

ssof

valu

e,da

te,a

ndra

rity.

The

com

pany

clai

ms

that

itgr

ades

7pe

rcen

tofa

llco

ins

liste

don

eBay

onlin

eau

ctio

ns.

j NT

C(N

umisT

rust

Cor

pora

tion)

offe

rsa

7-da

yse

rvic

e(in

stea

dof

4–5

days

)with

ath

ree-

coin

min

imum

.The

yof

fer

a20

-day

serv

ice

for

$10

per

coin

($16

for

gold

coin

s.M

oder

nco

ins

since

1955

are

only

$6ea

ch,a

lthou

ghan

othe

rlin

eon

the

web

site

stat

es$5

each

,and

the

“non

-gol

dec

onom

y”ra

teis

$8pe

rco

in(2

4–30

day

serv

ice)

.Coi

nspr

ior

to19

55co

st$7

togr

ade.

The

$50

figur

ein

the

rarit

ies

colu

mn

has

noth

ing

todo

with

rarit

yva

lue

butr

athe

rw

ithon

e-da

yse

rvic

e.So

urce

s:C

ompa

nyw

ebsit

esvi

ewed

onD

ecem

ber

6–7,

2013

;Cob

in(1

997:

101–

5).

614

Cato Journal

TA

BL

E5

Can

adia

nan

dB

riti

shR

are

Coi

nG

radi

ngSe

rvic

ePr

icin

g

Stan

dard

Serv

ice

Tur

naro

und

Tim

eV

arie

sO

ther

/Spe

cial

Non

gold

Rar

ities

w/o

Val

ueL

imit

Val

ueV

alue

Val

ueV

alue

Val

ueC

oins

orO

ther

(%V

alue

Cha

rged

)F

irm

/Cri

teri

aR

ange

1R

ange

2R

ange

3R

ange

4R

ange

5E

cono

my

Pric

eF

astS

ervi

ce

CC

CSa

CD

N20

CD

N20

CD

N20

CD

N20

CD

N20

n/a

n/a

CG

SbG

BP

14G

BP

24G

BP

39G

BP

65G

BP

95G

BP

141 /2

%of

valu

e

a One

Can

adia

nD

olla

rw

asw

orth

0.94

U.S

.Dol

lars

onD

ecem

ber

7,20

13.

b One

Brit

ishPo

und

was

wor

th1.

64U

.S.D

olla

rson

Dec

embe

r7,

2013

.Som

epr

ices

inth

eta

ble

are

roun

ded.

Coi

nG

radi

ngSe

rvic

esof

Ken

t,U

K,a

ppea

rsto

beaf

filia

ted

with

the

Tax

Fre

eGol

dst

ore.

“Sta

ndar

dse

rvic

e”(£

13.7

5)ta

kes

30to

90da

ysan

dth

eco

inva

lues

mus

tbe

unde

r£2

00.“

Nor

mal

serv

ice”

(£23

.75)

take

s30

to90

days

and

the

coin

valu

esm

ustb

eun

der

£2,0

00.

“Del

uxe

serv

ice”

(£39

)tak

es15

days

and

the

coin

valu

esm

ustb

eun

der

£5,0

00.“

Prem

ier

serv

ice”

(£65

)tak

es10

days

and

the

coin

valu

esm

ustb

eun

der

£10,

000.

“Sta

rse

rvic

e”(£

95)t

akes

5da

ysan

dth

eco

inva

lues

mus

tbe

unde

r£2

0,00

0.So

urce

:Com

pany

web

sites

.

615

Rare Coin Grading

The consumer price index stood at 149.7 in November 1994, risingto 233.6 in October 2013 (an increase of 56.1 percent). The percent-age change in prices in Table 4 is based on nominal prices, but thechanges in real terms are still significant, evidently reflecting returnsto reputation and higher quality. Fierce price competition forces eventhe best firms to keep their fees low. The rare coin industry is aremarkable testimony to just how well competition reduces consumerprices for important services. The volume is also high enough thatmany firms can enter the market (charging a lower price) and stillmake money, sometimes with slight product differentiation. One cansee exactly how much reputation is worth in the price differentialsbetween PCGS or NGC and everyone else (Wolinsky 1983).

Table 7 indicates that truly rare coins make up a relatively smallportion of all graded coins, especially coins minted outside of theUnited States. NGC subsidizes its core rare coin business by mainlyslabbing bullion and other nonrare (but still collectible) coins, which

TABLE 6Rare Coin Grading Service Slab Special Features

Slab Special Features

Holder Has Oversized Chemically Coin EdgeFirm/ Top Edge Holder Option Inert Flexible (Inside Slab)Criteria Viewing Label for Added Fee Plastic Case Is Viewable

PCGS No Yes No NoNGC No Yes No YesICG No No No NoANACS No No No NoPCI No No No NoSEGSa Yes No Yes NoACCGS No No No NoNCS No Yes No YesSGS No No No NoNTC No No No NoCCCS No No No NoCGS No No No No

aThis firm also provides a “sovereign series” service for $35 in which thesignature of a grading expert is encapsulated with the coin.Source: Company websites.

616

Cato Journal

TA

BL

E7

Sum

mar

yof

Sele

cted

Coi

nsan

dT

oken

sG

rade

dby

NG

C(D

ecem

ber

22,2

013)

Coi

nT

ype

/M

SPe

rcen

tage

ofN

umbe

rG

rade

d(_

sm.%

360

)Pr

oof

Tot

alal

lCoi

nsG

rade

d

U.S

.Silv

erD

olla

rs(5

type

s),1

840–

1978

3,50

9,81

741

,356

3,55

1,17

312

.64%

All

U.S

.Gol

dC

oins

(non

bulli

onco

ins)

,179

5–19

332,

682,

408

9,59

72,

692,

005

9.58

%U

.S.S

o-ca

lled

Dol

lars

(mai

nly

toke

ns,v

arie

tyof

met

als)

,18

,966

312

19,2

780.

07%

1826

–195

6T

otal

U.S

.Non

gold

Com

mon

Coi

ns:P

enni

es(1

859-

),N

icke

ls(1

866-

),D

imes

(183

7-),

Qua

rter

s(1

838-

),1,

814,

858

2,21

5,25

74,

030,

115

14.3

4%H

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olla

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alia

nC

oins

(pos

t-18

61un

ifica

tion)

5,21

15,

211

0.02

%F

renc

hC

oins

(pos

t-18

70)

10,9

2810

,928

0.04

%R

ussi

anIm

peri

alC

oins

(180

1–19

18)

70,8

2470

,824

0.25

%E

nglis

hIm

peri

alC

oins

(160

0–17

07)

3,31

93,

319

0.01

2%M

exic

anC

olon

ialC

oins

(160

1–18

23)a

6,52

66,

526

0.02

3%N

ewZe

alan

dC

oins

/Bul

lion

Coi

ns(p

ost-

1856

)3,

352

3,35

20.

012%

Chi

lean

Coi

ns,M

ainl

yG

old

and

Som

eSi

lver

Col

onia

lEra

999

999

0.00

4%R

epub

lic(1

817-

)2,

292

2,29

20.

008%

Tot

al3,

291

3,29

10.

012%

U.S

.Bul

lion

Coi

nsSi

lver

(1ou

nce)

5,76

8,88

997

7,72

86,

746,

617

24.0

1%Si

lver

(5ou

nce)

62,2

1523

,776

85,9

910.

31%

617

Rare Coin Grading

Gol

d1,

050,

628

372,

352

1,42

2,98

05.

06%

Plat

inum

141,

579

62,4

8720

4,06

60.

73%

Tot

al7,

023,

311

1,43

6,34

38,

459,

654

30.1

1%C

hine

sePa

nda

Coi

nsA

llB

ullio

n35

3,58

735

3,58

71.

26%

Hon

gK

ong

$1,0

00G

old

Bul

lion

871

871

0.00

3%C

anad

ian

Map

leL

eaf,

1979

-(a

llsi

zes)

Gol

dan

dSi

lver

Bul

lion

14,2

0414

,204

0.05

1%C

anad

ian

Map

leL

eaf(

18.7

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are by definition much more abundant. My email conversations withsome other firms and information posted on the Internet suggest thatthe industry has changed over the years. There is far more diversityin coin grading now than ever before, which is confirmed by the datafrom NTC in Table 8; NTC mainly deals with collectible coins butalso has a significant business in grading medals and tokens.

It seems plausible that very valuable coins only go to the best firmsfor grading since an incorrect grade would be so costly. In addition,the higher grading cost of the top firms is often miniscule relative tothe price of the coin, making the use of lower-quality firms less sen-sible, other things being equal. About 70 percent of the coins gradedby NTC contain silver, gold, or platinum, rather than copper or abase metal (Table 8). This fact likely reflects the new firm’s compar-ative advantage in grading rare or collectible coins with strong slabanti-counterfeiting measures.

Innovative Services Offered by Coin Grading Firms to MeetChanging Demand

Coin grading firms also offer special services. For example, someprovide medallion, medal, and token grading; imaging services;

TABLE 8Coin Grading Service Markets for NTC

(Percentage of Coins Graded by Category)

Rare Collectible Coins “Bullion” or Other Medals &Coins MS-60_ Proof Coins Coins Tokens

5% 70% 5% 10% 10%

SOURCE: emails received from Joe LaBarbera with NumisTrust CoinGrading Service on December 24 and 26, 2013, including data from opera-tions since the firm restarted on May 1, 2013. He adds: “The New NTC isdedicated to providing consistent coin grading according to the currentmarket standards with excellent turnaround time, at fair pricing levels withoutstanding customers service. Dealers and collectors will be able to distin-guish the ‘New NTC holder’ because of the new hologram that is exhibitedon the backside of our holder. NTC has also added secret security featuresto the holder to provide additional security and anti-counterfeiting. Ourconcern is that counterfeit slabs will undoubtedly plague the certified coinbusiness in the future. NTC has taken steps now to prevent this.”

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ancient coin authentication; shipwreck certification; conservation(residue removal and surface protection) services; slabbing into over-size holders; and metallurgic analysis. Newcomer SEGS is challeng-ing the market share of PCGS and NGC by offering its upgraded slabfor a lower price and quicker turnaround time, although the recentProfessional Numismatists Guild industry survey indicates that deal-ers consider SEGS standards to be poor. Hence, SEGS will not becatching up to the bigger players anytime soon. Apparently, peopleare willing to pay more for widespread acceptance (higher reputa-tion) and perhaps the security associated with the longevity of lead-ing firms. Market-based regulation of quality seems to work well.

Another interesting fact about the grading industry has to do withthe apparent consumer ignorance regarding the quality of differentgrading services. Although many consumers are well apprised of coingrading services, others may not be so careful in their selection still.Accordingly, any encapsulation and grading may well be better thannone at all—especially for lower-valued coins, and in that case, thevery-low-cost firms fill an important niche (especially firms likeANACS, ICG, and perhaps NTC, SGS, and SEGS). This consumerdemand feature also allows easier entry for newcomers to theindustry.

This case study has primarily focused on the grading of rare coins,that is, coins with low mintage, few surviving specimens, or a veryhigh grade based on quality (condition). Nonetheless, as noted ear-lier, companies in the certification industry actually serve otherimportant and profitable markets, too, from which the lion’s share oftheir income is apparently derived. Probably more than one-half ofall coins slabbed could not rightly be considered “rare.” The gradingcompanies contacted were loath to give out sales information.

However, a few firms did provide data on the kind of coins theygrade. As noted in Table 7 and Table 8, changing consumer demandhas permitted NGC and NTC to profit by grading modern coins and“bullion coins” (i.e., those having only precious metal value). They alsograde collectible coins and some medals that do not necessarily carrysignificant value over the value of the precious metals they contain—if they contain any precious metal at all. Nowadays, many more mod-ern coins are slabbed and in many cases hardly carry enough value topay for the slabbing. In effect, the smaller volume of the mostspecialized and rigorous grading services for rare coins are being sub-sidized by more mundane, higher-volume ones. Also of interest is the

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dominance of U.S. coins. According to tables on the NGC website,about 75 percent of the millions of coins graded by NGC have beenU.S. coins. This 75 percent figure is echoed by NTC, too, whichfocuses far less on bullion coins and far more on medals and tokensthan NGC does.

Moreover, coin dealers have subjective preferences that causethem to prefer one service to another on a micro level. For example,they may prefer NGC for “tighter” grading of gold coins and PCGSfor “tighter” grading of silver dollars (Cobin 1997: 101–2). Firms spe-cialize in such nuances to meet consumer demand. Those firms thatdo not adapt may fall into disrepute. Poorer grading reputations gen-erally reflect conflicts of interest perceived by the market. Notably, agrading firm might have an affiliated business as a coin dealer, andthis nexus can naturally cause suspicion. Perceptions of inferior grad-ing techniques, such as assigning a different grade to the front andback of a coin, also tends to lower a firm’s reputation. Bad firms even-tually go out of business; the black sheep provider INS in 1994(Cobin 1997: 103) could not stay in the market for long once it hadattained its bad reputation.

Additionally, coins graded “early” (usually identified by the differ-ent shape of the slabs used when coin-grading services were justemerging) are considered to have been graded “tougher” and carry apremium. The market adjusts for this fact. Older graded coins maywell be “upgraded” after re-grading (Cobin 1997: 101–2). The priceof slabbing services is generally low (an expected result of competi-tion), especially when one considers the cost relative to higher-valuedcoins. Thus, onlookers can readily see how the industry dynamicallyassimilates information about firm quality, past products, and con-sumer or dealer tastes over time.

The market has spontaneously generated a firm that evaluates theoutput of top graders NGC and PCGS, too. Certified AcceptanceCorporation, founded in 1987 by John Albanese (co-founder ofPCGS and founder of NGC), affixes a “green tamper-evident holo-graphic sticker” when a coin is correctly graded and a “gold” one ifit is undergraded. Coins that “just make the grade” or overgradedcoins receive no sticker. Another important market innovation in thecoin grading industry is offering “reconsideration” or “crossover”services (Table 9). With this service, a firm promises not to breakopen the slab of the competing firm unless it can assure the submit-ter that the grade will be at least as high or higher. The cost of

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upgrading one’s grading service need not be expensive (except per-haps for high-valued coins sent to PCGS), and the potential gainsfrom an improved grain are significant. Top firms are thus enabledto damage competitors and put distance between themselves andother firms.

Shipping and Insurance Costs

Shipping costs are reasonable, and depend on speed of delivery,size of order, insurance, and distance to destination. The greater thenumber of coins submitted, the lower the average shipping cost.Regular service turnaround times range from 10 to 15 days.Additional fees are charged for insurance coverage during shipping.

The United States Post Office will not insure coins being shippedbut it will accept and insure “numismatics and collectibles” (includ-ing coins in that category) with value proven by a third-party service.For example, a numismatic coin worth $200,000 can be shippedinsured by registered mail in the United States for $180 and, for coinsworth up to $100,000, shipped insured internationally anywhere for$55 ($46 to Canada and $52 to Europe).

The ANACS website lists a price of $79 to ship and insure a coinvalued at $100,000 (customers must call for a shipping and insurancequotation on higher-valued coins), and NTC charges $80 for a coinof the same value. Customers with accounts at private courier serv-ices like Federal Express and UPS can also obtain reasonably priced

TABLE 9Reconsideration (Crossover) Fees Charged by

Participating Coin Grading Services

Firm “Reconsideration” or “Crossover” Fee

PCGS Basic fee for chosen service _ 1% of value if coin upgrades.NGC “There is no additional fee for Crossover; only the grading

tier charges apply.” Only PCGS graded coins can besubmitted, except that sister-company NCS coins can bedone for $5.

ACCGS $10SEGS $22

Source: Company websites.

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insurance for the coins shipped, around $200 for a coin valued at$75,000.

There is company called ShipAndInsure6 mentioned on NGC’swebsite, which is affiliated with the North American CollectiblesAssociation, that specializes in facilitating coin shipments using majorcarriers in the United States and worldwide. Association membersare able to get discounts and, importantly, larger limits on the valueof coins that can be shipped. Some shippers for certain classes ofservice will not insure a coin for more than $75,000 or even as littleas $10,000. In some cases in the United States, a homeowner’s insur-ance policy might cover all or part of the value of a shipped coin.

Some of the major grading companies also provide insurance,such as ICG, which has base prices as low as $20 per coin, in theUnited States, to $75 internationally. SGS will insure five coins worthup to $4,999 each for an $18 fee. PCI has an insurance cost table onits website; the insurance cost for a $25,000 coin is $35. The cost ofcoin insurance has evidently dropped in the last two decades. In1994, PCI charged a fee of $115 for a $25,000 valued coin (Cobin1997: 104)—329 percent higher than current pricing—which was (atthe time) relatively expensive compared to other firms.

Effective Grading Services Alleviate MarketImperfections

Rare coins are uniquely differentiated goods. Differences and dis-crepancies between coins are not easily noticed. Typically, greatersupply and fungibility in a widely minted coin series means that acoin in that group is less likely to command a high price beyond itscommodity value as a metal. Even in low mintage issues, there areconsiderable differences in coin condition that warrant grading todifferentiate them. Until the late 1980s, coin grading was not a stan-dard process. Individual dealers would grade the coins. Those indi-viduals who did not have the same specialized knowledge as the coindealer were at a disadvantage when buying or selling rare coins.

For example, a dealer could say that a coin offered to him is anMS-65 when in fact it is an MS-66, which commands a higher price.(The visual difference between an MS-65 and an MS-66 is not dis-cernible to most people.) After buying the coin, packaging it and

6 The company website is https://shipandinsure.com.

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offering it for sale as an MS-66 would be facile for the dealer.Because of the fineness of the coin, fungibility, and extensive supply,such quasi-fraud would be virtually undetectable. (The same coincould be seen by its former owner during a future visit and not bedetected.) A similar problem arises when the roles are reversed in thetransaction. The dynamic rare coin certification industry has evolvedto alleviate such inequity.

As we have seen, privately owned and competing grading firmshave spontaneously generated in the market, offering sufficientsalaries to attract noted industry experts to grade coins exclusively.The resulting grading and slabbing provides market participants withan objective and reliable means of evaluating rare coins. These inter-mediaries allow buyers and sellers to avoid the costs of irksome assaytesting, weighing, and examining for genuineness, rarity, or fineness.Accordingly, transactions (knowledge acquisition) costs associatedwith information gathering and verification are minimized. Not sur-prisingly, the cost of grading is also internalized into the price oftraded coin (i.e., an encased or slabbed graded coin often sells for aslightly higher price than if it is still “raw”). Markets have ampleincentives to provide information and that public benefit is oftenregarded as a public good. Notably, the influence of free-riding hasnot precluded the provision of this service.

Therefore, the market can be trusted to produce a reliable high-quality informational public good, and the quality of market provisionis automatically enforced since grading and certification services havean incentive to protect their reputations. As demonstrated in Table 3,firms with the best reputation for reliability (i.e., greysheet percent-age) also have the highest market share, and command the highestprices for services. Grading and certification services inadvertentlymitigate the free-rider problem. Of course, these firms did not evolvewith the express purpose of resolving a public goods problem, butrather to provide third-party assurances that are demanded by manyprivate shoppers and investors. Like the self-interest motive of AdamSmith’s baker that ended up “feeding” Paris, the economic goals ofrare coin graders has inadvertently led to social benefits.

Rare coin grading and certification firms have met consumerdemand, and thus created “public good” benefits for everyone whowants them. Yet rare coin owners and sellers are content to continueto purchase these services nonetheless, despite the fact that the infor-mation is nonrival in consumption. All who can partake of the good

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do so without lessening the amount to other people. Each coin isunique, but if rare coin owners or dealers display them for the pur-pose of sale then they cannot bar certain patrons. Consequently,information about the coins “publicly” provided by the market mightbe considered nonexcludable.7

Conclusion: A Market Alternative toGovernment Regulation

The preceding example of grading and certification services in therare coin industry has considerable ramifications for the grading ofreal property, military hardware, public transportation highway vehi-cles and aircraft, air and water quality, farmland and watershed eval-uation, food, electrical generation dams and devices, automobiles,pharmaceuticals, educational institutions, and many other goods andservices. In North America, South America, and Europe, grading andcertifying is often provided by the state or one of its municipal sub-divisions, although private inspectors in some cases (e.g., for build-ings) are occasionally hired by individuals, insurance companies, andutility companies. Planning boards and their inspectors provide grad-ing services, despite the fact that the market could provide effectivegrading services, as it does in other industries.

The ostensible purpose for government intervention into transac-tions for both real and personal property is multifarious, but it hasbeen primarily to alleviate imperfect information and to reduce neg-ative externalities. An assumption is made that the government willnot garner monopoly profits because it exists for the “public interest”and not to maximize profits. Moreover, the government is often pre-sumed to provide a dispassionate, objective, and reliable evaluationof quality—conjecture that has been called into question by manyeconomists.

Certainly, the cost of these government benefits is considerable;there is no free lunch. In other words, a uniform minimum standardof quality is expensive. But are transactions costs really lowered bygovernment regulation of the quality of goods, or have the costs just

7 However, other providers of information that might be considered public goods,such as library councils, building owners, and Internet services, can likewise bar“undesirable” persons from consumption. Hence, if informational services are con-sidered public goods, there must ultimately be exceptions to nonexcludability.Consequently, these services can hardly be considered public goods.

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been shifted or internalized into the price of the improvements?Contrary to findings that price regulation improves quality(Anderson and Enomoto 1986: 87), other evidence suggests that gov-ernment regulation minimally impacts (Jordan 1972) or even debasesquality, not to mention increasing the associated transactions coststhat would have otherwise been avoided (Cobin 1997, Anderson1994, Lave 1992) and the shortcomings of government-providedinformational services (Magat and Viscusi 1992). The present studyof grading in the rare coin industry demonstrates, too, that marketshave provided high quality without government regulation (High1991), avoiding the pitfalls of regulation that have worriedresearchers (Hertog 2010: 46), such as bureaucratic inefficiency,public choice, and knowledge problems.

Important questions need to be answered. Would transactions(knowledge) costs be lower if the market were to provide an alterna-tive, competitive grading system? Are consumers merely beingforced to buy a very expensive insurance policy from the govern-ment? If the evidence from the rare coin industry provides a clue,then we may conclude that markets would provide more effectiveand efficient means of generating information when it certifies qual-ity. The government’s informational “insurance policy” is demon-strated to be too expensive and does not provide the quality ofcoverage that would be cheaply provided by the market.

Furthermore, it is not clear that people demand such a uniformdegree of certainty when buying goods, services, or real property.Why should everyone be compelled to pay for part of the same pub-lic good (i.e., quality information), which is an additional cost of reg-ulation? For instance, it is conceivable that if the cost of suchcertainty exceeded even a small percentage of the good or property’svalue, then some consumers would prefer to save the added expenseby assuming the associated risks themselves (i.e., self-insuring).

Markets are capable of developing effective and reliable means forgrading other goods and property that are analogous to grading serv-ices in the rare coin industry. The rare coin industry has sponta-neously developed an effective, inexpensive grading system. It was anunintended consequence of human action, which led to greater coor-dination and increased knowledge. Moreover, those individuals whoparticipate in trading rare or otherwise valuable coins are not dis-gruntled over the existence of grading firms. Will regulators arguewith this success? If so, are they, as Mises (1996: 850) asked, merely

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protecting favor brokering and rent seeking, and aiming at the per-petuation of their own supremacy? Surely, it makes no sense toblindly accept the preferences of a majority of unenlightened votersor a handful of ostensibly enlightened bureaucrats.

What would a world certified by private grading firms look like?One could imagine a potential situation where grading firms com-pete with one another. As long as each grading firm maintains highstandards—because of competition—it will be able to receive pre-mium revenues and preserve its reputation relative to other firmsand consumer costs will fall. Lower-quality services will be obliged toassuage consumers by charging lower prices, and will likely go out ofbusiness if they do not improve the quality of their service over time.In the information market, a reputation for accuracy and reliability isof paramount importance. One foul-up and a firm may be finished.

Furthermore, market-based grading and certification services canbe a higher-order “knowledge” good. While the knowledge problem(Hayek 1945, Holcombe 1995, Sowell 1996) can never fully be over-come, its severity may be alleviated by more and better information.Yet obtaining such information is costly. As Alchian (1977: 133)notes, “Those costs of becoming informed about what a good or serv-ice or rented good will do, raise transfer costs and also reward longeror greater searching activity by potential buyers or employers.”Therefore, information, like most things, is scarce and needs to beeconomized. In addition to economizing scarce information, gradingfirms must also adapt to changing conditions. “It is certainly true,”wrote Mises (1996: 852), “that the necessity of adjusting oneself againand again to changing conditions is onerous. But change is theessence of life.” Markets are flexible and dynamic enough to handlethat change.

Accordingly, because consumers are uneasy about their ignoranceand want to improve their market information, it follows that firmswill spontaneously develop (in the Hayekian sense) and specialize inproviding knowledge (e.g., grading or certification services) at thelowest cost. Far from being nugatory market institutions, the exis-tence of such firms indicates the further advancement of economicprosperity.

In the final analysis, reputation enhancement and knowledge pro-duction are indispensable elements of the market process. Hence,the key issue concerns whether government bureaucracies or themarket is the superior generator of such knowledge. What is clear

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from the study of grading services in the rare coin industry is that themarket process has successfully made provision for setting standardsand regulating quality without any reliance on government. Market-based regulation is not only possible, it is likely, and it emerges with-out public policy to satisfy consumer demand efficiently.

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