Abstract
This paper provides empirical evidence on the welfare losses associated with asymmetric information about product quality in a competitive market. When consumers cannot observe product characteristics at the time of purchase, atomistic producers have no incentive to supply costly quality. We compare wine prices across administrative districts around the enactment of historic regulations aimed at certifying the quality of more than 250 French appellation wines to identify welfare losses from asymmetric information. We estimate that these losses amount to more than 7% of total market value, suggesting an important role for credible certification schemes.
Highlights
In his foundational paper, Akerlof (1970) formalized the notion that a consumer’s inability to ascertain quality differences in products may “drive the good product out of the market,” resulting in a socially undesirable outcome
34As a point of comparison, Jensen and Miller (2008) report standard errors clustered at the level of the treatment unit in a panel regression that includes county-by-year fixed effects, even though the number of households per county in their study is 100–150
This article provides empirical evidence that the quality of wines sold under appellation prior to a pioneering 1935 law was below the social optimum, and that the reform allowed producers to profitably adopt quality-enhancing practices
Summary
In his foundational paper, Akerlof (1970) formalized the notion that a consumer’s inability to ascertain quality differences in products may “drive the good product out of the market,” resulting in a socially undesirable outcome. Together with our estimated effect on the average wine price, this share implies a welfare loss of about 13% in the French wine market – inclusive of all wines – due to asymmetric information prior to the reform This value represents a gross welfare loss in the sense that it does not account for the added cost of quality-enhancing practices required for wines sold under AOC designation. A series of experimental studies have shown how improved access to and control of information can increase market efficiency by lowering search costs and limiting corruption (Jensen, 2007; Jensen and Miller, 2018; Andrabi et al, 2017; Duflo et al, 2013), or instead generate perverse selection effects (Dranove et al, 2003) In their extensive literature review, Dranove and Jin (2010) note that there are many examples in which quality disclosure has allowed consumers to find sellers who best meet their needs [...] there is less evidence that sellers respond by boosting quality.
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