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Quality Inspection, Adverse Selection And Trade In Perishable Commodities

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  • Dimitri, Carolyn
  • Lichtenberg, Erik

Abstract

The quality of many goods and services may change randomly between the time of shipment and delivery, creating disputes over quality that can result in lemons-market equilibria. We investigate the potential of third-party inspections for such inefficiencies. We consider two types of inspection, ex post verification of quality in consignment contracts and ex ante certification in FOB contracts, which were instituted for fruits and vegetables in the U.S. when national markets were emerging. We show that both types of inspection can counteract misallocations of quality found in lemons-market equilibria. Buyers prefer ex post verification to ex ante certification while sellers prefer the reverse. Government provision of inspection services may be necessary for making provision of inspection services economically viable, and may be desirable for reducing inefficiencies due to the costliness of inspection. The U.S. experience may provide lessons for developing countries in creating marketing institutions to foster economic growth.

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Bibliographic Info

Paper provided by University of Maryland, Department of Agricultural and Resource Economics in its series Working Papers with number 28579.

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Date of creation: 2002
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Handle: RePEc:ags:umdrwp:28579

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Keywords: International Relations/Trade;

References

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  1. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  2. Choe, Chongwoo, 1998. "Contract design and costly verification games," Journal of Economic Behavior & Organization, Elsevier, vol. 34(2), pages 327-340, February.
  3. Leland, Hayne E, 1979. "Quacks, Lemons, and Licensing: A Theory of Minimum Quality Standards," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1328-46, December.
  4. Albano, Gian Luigi & Lizzeri, Alessandro, 2001. "Strategic Certification and Provision of Quality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 267-83, February.
  5. Reinganum, Jennifer F. & Wilde, Louis L., 1985. "Income tax compliance in a principal-agent framework," Journal of Public Economics, Elsevier, vol. 26(1), pages 1-18, February.
  6. De, Sankar & Nabar, Prafulla, 1991. "Economic implications of imperfect quality certification," Economics Letters, Elsevier, vol. 37(4), pages 333-337, December.
  7. 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.
  8. Dimitri, Carolyn, 2002. "Contract Evolution And Institutional Innovation: Marketing Pacific-Grown Apples From 1890 To 1930," The Journal of Economic History, Cambridge University Press, vol. 62(01), pages 189-212, March.
  9. Alessandro Lizzeri, 1999. "Information Revelation and Certification Intermediaries," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 214-231, Summer.
  10. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
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