Agricultural Production Clubs: Viability and Welfare Implications

Consumers are, in general, less informed than producers about the quality of agricultural goods. To reduce the information gap, consumers can rely on certification that ensures the quality and origin of the goods. Certification can be voluntarily adopted by a group of producers, as is the case for geographical indications. We model such a group as a club, and analyze the certification decision of the club and its welfare implication. We find that for intermediate values of certification costs, the industry and a club of a given size have divergent incentives, and there may be overprovision of certification. If club members can erect barriers to entry, an optimal size of the club exists. There may be a conflict between the efficient outcome (that maximizes the aggregate profit of the firms) and the equilibrium, which may be socially undesirable. In the absence of a barrier to entry, it is less likely that a club will emerge.