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Verification In Contracts With Random Changes In Quality

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  • Dimitri, Carolyn
  • Lichtenberg, Erik

Abstract

Many goods and services are subject to random changes in quality during the time between sale and delivery, resulting in markets characterized by lemons-market equilibria. We examine two forms of costly verification, ex post inspection and ex ante certification. In equilibrium, ex post verification is used to verify buyers' reports of low quality, while ex ante certification is used to verify sellers' shipments of high quality. Ex post inspection allows buyers to earn rents; in some circumstances, ex ante certification allows sellers to earn rents. One would expect buyers to prefer ex post inspection while sellers prefer ex ante certification.

Suggested Citation

  • Dimitri, Carolyn & Lichtenberg, Erik, 2000. "Verification In Contracts With Random Changes In Quality," Working Papers 28565, University of Maryland, Department of Agricultural and Resource Economics.
    • Handle: RePEc:ags:umdrwp:28565
    DOI: 10.22004/ag.econ.28565
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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