Limiting Biotechnology? Information Problems and Policy Responses

The revolution in biotechnology poses pervasive, although not entirely unprecedented, asymmetric information problems. Especially in Europe, but even in North America, there is mounting evidence that consumers do not treat genetically modified foods (GMFs) and their non-modified counterparts as perfect substitutes. If other things such as prices are equal, many consumers would prefer to consume non-GMFs; they perceive GMFs as lower-quality products. While farm-level producers are fully informed on the genetic qualities of their product, final consumers will often be unable to distinguish between the two types of products. Thus, the information structure will only sustain a pooling equilibrium, in which both GMFs and non-GMFs are sold together, or pooled, in a single market. Such hidden-type or adverse-selection problems tend to generate markets that are dominated by an inefficient proportion of low-quality products or “lemons” (Akerlof, 1970). The asymmetric information problem potentially could be addressed by an identity preservation system (IPS) that involves product certification and labelling. A fully effective IPS would lead to a separating equilibrium, or separate markets for GMFs and non-GMFs. This paper provides a systematic investigation of the asymmetric information problem posed by biotechnological innovations and then assesses possible IPSs.