Abstract
Adverse selection is expected to occur with agricultural products because they are credence goods with respect to food safety. However, these products’ safety levels are usually higher than the safety standards set by public agencies. This study suggests reasons for this phenomenon through theoretical examinations and numerical simulations, producing several results. First, even if we suppose that the cost functions of firms producing higher-quality products are in the upper regions, not only can firms producing the lowest-quality products remain in a ‘market for lemons’ but other firms can as well. Second, if we relax the above assumption about cost functions, even firms producing the highest-quality products can remain in a lemon market, while firms producing middle-quality products can increase their sales. Moreover, the WTP at some stage can be more than the initial WTP.
Highlights
A fundamental function of food is providing nutrition
Under assumption 1, the willingness to pay (WTP) at any stage t is less than the initial WTP
This study’s theoretical examinations and numerical simulations have explored why adverse selection in the food safety context does not seem to occur in the agricultural products market even when no labelling system is used
Summary
A fundamental function of food is providing nutrition. Humans once needed to ensure a minimum calorie intake under income constraints. We can assume consumers are increasingly aware of the average food safety levels It follows that they will purchase products when their willingness to pay (WTP) is, at most, as high as their willingness to pay for average quality products. Previous studies of this topic have introduced various systems for preventing adverse selection and securing food safety levels. Despite the additional costs required to improve food safety (driven by the need for additional equipment and/or testing) and as reduced pesticide use increases the risk of disease and insect damage, products that offer higher safety levels are still being marketed, and at a price that does not fall.
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