Incentives, Information Systems and Competition.

Abstract

We show how different competitive regimes affect the ability to provide incentives based on noisy information systems. Reduced competition facilitates incentive provision. This may rationalize both vertical integration and horizontal integration as seen in many agricultural markets with uncertain quality grading. Moreover, if trading terms are settled before the information is observed, a noisy information system suffices to give proper incentives. This may rationalize the use of long term conditional price contracts in the trading of many agricultural products.Quality; Testing; Industrial Organization; Information Externalities