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Quality Inspection, Adverse Selection and Trade in Perishable Commodities

By Carolyn Dimitri, Carolyn Dimitri and Erik Lichtenberg and Erik Lichtenberg

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 maybe 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 ins titutions to foster economic growth. Many goods and services are subject to random changes in quality during the time between shipment and delivery. Agricultural commodities are a prime example. Despite efforts to control quality during production (for example, by controlling the varieties grown, in-season production decisions like pesticide application, and timing of harvest), problems in ensuring quality may persist because most agricultural products are perishable, making it possible for onfarm quality to differ from delivered quality. For example, fruit may contain spores that are unobservable at the time of shipping, but blossom into mold during shipment. Grains may absorb moisture and insect eggs may hatch during shipment, reducing quality prior to delivery. When quality deteri..

Year: 2007
OAI identifier: oai:CiteSeerX.psu:10.1.1.19.630
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