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Asymmetric Grading Error And Adverse Selection: Lemons In The California Prune Industry

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  • Chalfant, James A.
  • James, Jennifer S.
  • Lavoie, Nathalie
  • Sexton, Richard J.

Abstract

Grading systems are often introduced to address the classic adverse selection problem associated with asymmetric information about product quality. However, grades are rarely measured perfectly, and adverse selection outcomes may persist due to grading error. We study the effects of errors in grading, focusing on asymmetric grading errors- namely when low-quality product can erroneously be classified as high quality, but not vice versa. In conceptual model, we show the effects of asymmetric grading errors on returns to producers. Application to the California prune industry shows that grading errors reduce incentives to produce more valuable, larger prunes.

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File URL: http://purl.umn.edu/30878
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Bibliographic Info

Article provided by Western Agricultural Economics Association in its journal Journal of Agricultural and Resource Economics.

Volume (Year): 24 (1999)
Issue (Month): 01 (July)
Pages:

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Handle: RePEc:ags:jlaare:30878

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Web page: http://waeaonline.org/
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Related research

Keywords: Crop Production/Industries;

References

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  1. David A. Hennessy & Thomas I. Wahl, 1997. "Discount Schedules and Grower Incentives in Grain Marketing," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(3), pages 888-901.
  2. Hennessy, David A., 1996. "Economics of Purifying and Blending, The," Staff General Research Papers 5261, Iowa State University, Department of Economics.
  3. Mason, Charles F & Sterbenz, Frederic P, 1994. "Imperfect Product Testing and Market Size," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(1), pages 61-86, February.
  4. Matsumoto, Masao & French, Ben C., 1971. "Empirical Determination of Optimum Quality Mix," Agricultural Economics Research, United States Department of Agriculture, Economic Research Service, issue 1.
  5. Hennessy, David A., 1996. "Information Asymmetry As a Reason for Food Industry Vertical Integration," Staff General Research Papers 5032, Iowa State University, Department of Economics.
  6. Erik Lichtenberg, 1997. "The Economics of Cosmetic Pesticide Use," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(1), pages 39-46.
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Citations

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Cited by:
  1. Fraser, Iain, 2005. "Microeconometric analysis of wine grape supply contracts in Australia," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 49(1), March.
  2. Moisés de Andrade Resende Filho & Brian L. Buhr, 2006. "A Principal-Agent Model For Evaluating The Economic Value Of A Beef Traceability System: A Case Study With Injection-Site Lesions Control In Fed Cattle In The Us," Anais do XXXIV Encontro Nacional de Economia [Proceedings of the 34th Brazilian Economics Meeting] 127, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  3. Hennessy, David A., 2007. "Informed control over inputs and extent of industrial processing," Economics Letters, Elsevier, vol. 94(3), pages 372-377, March.
  4. Miguel Carriquiry & Bruce A. Babcock, 2007. "Reputations, Market Structure, and the Choice of Quality Assurance Systems in the Food Industry," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(1), pages 12-23.
  5. Marcoul, Philippe & Lawrence, John D. & Hueth, Brent, 2006. "Grader Bias In Cattle Markets? Evidence From Iowa," 2006 Annual meeting, July 23-26, Long Beach, CA 21123, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  6. Resende Filho, Moises de Andrade, 2007. "A Principal-Agent Model for Investigating Traceability Systems Incentives on Food Safety," 105th Seminar, March 8-10, 2007, Bologna, Italy 7897, European Association of Agricultural Economists.
  7. Starbird, S. Andrew & Amanor-Boadu, Vincent, 2006. "Do Inspection and Traceability Provide Incentives for Food Safety?," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 31(01), April.
  8. Ferrier, Peyton & Liu, Qihong, 2010. "Consumer sorting of vertically differentiated goods," Economics Letters, Elsevier, vol. 109(1), pages 11-13, October.
  9. Jan Fałkowski, 2008. "Vertical coordination from the angle of farmer loyalty and access to credit. Evidence from the Polish dairy sector," Working Papers 2008-01, Faculty of Economic Sciences, University of Warsaw.

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