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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.

Suggested Citation

  • Chalfant, James A. & James, Jennifer S. & Lavoie, Nathalie & Sexton, Richard J., 1999. "Asymmetric Grading Error And Adverse Selection: Lemons In The California Prune Industry," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 24(01), July.
  • Handle: RePEc:ags:jlaare:30878
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    Cited by:

    1. 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.
    2. 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.
    3. 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].
    4. Jang, Ju Won & Ishdorj, Ariun & Anderson, David P., 2015. "Searching for the Possible Sources of Grader Bias in Beef Grading: A Non-parametric Approach," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205734, Agricultural and Applied Economics Association;Western Agricultural Economics Association.
    5. Iain Fraser, 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), pages 23-46, March.
    6. Hennessy, David A., 2007. "Informed control over inputs and extent of industrial processing," Economics Letters, Elsevier, vol. 94(3), pages 372-377, March.
    7. Philippe Marcoul & John Lawrence, 2007. "Grader Bias in Cattle Markets? Evidence from Iowa," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(4), pages 890-903.
    8. 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.
    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.
    10. Ferrier, Peyton & Liu, Qihong, 2010. "Consumer sorting of vertically differentiated goods," Economics Letters, Elsevier, vol. 109(1), pages 11-13, October.
    11. Hussein, Mohamud & Martinez, Marian Garcia & Fearne, Andrew, 2013. "On The Efficiency of Management-Based Regulation: A Case Study of the UK Poultry Inspection Regime," 87th Annual Conference, April 8-10, 2013, Warwick University, Coventry, UK 158856, Agricultural Economics Society.

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