Regulating an Experience Good Produced in the Formal Sector of a Developing Country when Consumers Cannot Identify Producers
Timothy J. McQuade
Harvard University - Department of Economics
Stephen W. Salant
University of Michigan; Resources for the Future
Jason A. Winfree
University of Michigan at Ann Arbor - Program in Sports Management
November 24, 2010
Resources for the Future Discussion Paper No. 10-52-REV
In developing countries, consumers can buy many goods either in formal markets or in informal markets and decide where to purchase based on the product's price and anticipated quality. We assume consumers cannot assess quality prior to purchase and cannot, at reasonable cost, identify who produced the good they are considering. Many products (meats, fruits, vegetables, fish, grains) sold both in formal groceries and, less formally, on the street fit this description. We assume that producers can adjust quality at a cost and only firms in the formal sector are subject to government regulation. In the long run, producers migrate to the sector that is more protable.
Using this model, we demonstrate how regulations in the formal sector can lead to a quality gap between formal and informal sector goods. We moreover investigate how changes in regulation affect quality, price, aggregate production, and the number of firms in each sector.
Number of Pages in PDF File: 32
Keywords: Experience Good, Formal Sector, Informal Sector, Quality
JEL Classification: 017, D43working papers series
Date posted: November 25, 2010 ; Last revised: October 6, 2012
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