Asymmetric Grading Error and Adverse Selection: Lemons in the California Prune Industry
نویسندگان
چکیده
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 a 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.
منابع مشابه
Grading error reduces grower incentives to increase prune quality
Fig. 1. Dried Fruit Association prune grading system. Grading is important to ensure the production ofhlgh-quallty foods, but It Is usually done with error, distorting market signals and diminishing Incentives to produce hlgh-quallty products. Size is the main quality criterion for dried prunes and the crucial characteristic In determining prune value. We studied the economic effects oferrors I...
متن کاملGrading Error in the California Prune Industry
Food demand in the U.S. is rather stable. As their incomes rise, most people do not consume more food; rather, they eat better, higher-quality foods. Thus, the quality dimension of the U.S. food industry has become increasingly important. The most successful growers and marketers have been those who are consistently able to provide high-quality products to consumers. Grading of farm commodities...
متن کاملWorking Paper No. 11-36 Trading Dynamics in Decentralized Markets with Adverse Selection
We study a dynamic, decentralized lemons market with one–time entry and characterize its set of non–stationary equilibria. This framework offers a theory of how a market suffering from adverse selection recovers over time endogenously; given an initial fraction of lemons, the model provides sharp predictions about how prices and the composition of assets evolve over time. Comparing economies in...
متن کاملInverse Adverse Selection: The Market for Gems
This paper studies markets plagued with asymmetric information on the quality of the goods traded. In Akerlof’s setting, sellers are better informed than buyers. In contrast, we examine cases where buyers are better informed than sellers. This creates an inverse adverse-selection problem: The market tends to disappear from the bottom rather than from the top. In contrast to the traditional mode...
متن کاملThe "Lemons" Problem in C2C Markets
Asymmetric information and adverse selection widely exist in used product markets. However, current C2C markets have two significant features: dynamic online evaluation system and “smarter” buyers (defined as customers with more prior information). In our primary analysis on the first feature, we find that higher quality used items are available in C2C markets and the size of the markets become...
متن کامل