Regulating an Experience Good Produced in the Formal Sector of a Developing Country when Consumers Cannot Identify Producers

Resources for the Future Discussion Paper No. 10-52-REV

32 Pages Posted: 25 Nov 2010 Last revised: 6 Oct 2012

See all articles by Timothy J. McQuade

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

Multiple version iconThere are 2 versions of this paper

Date Written: November 24, 2010

Abstract

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 fi t 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 pro table.

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 a ffect quality, price, aggregate production, and the number of firms in each sector.

Keywords: Experience Good, Formal Sector, Informal Sector, Quality

JEL Classification: 017, D43

Suggested Citation

McQuade, Timothy J. and Salant, Stephen W. and Winfree, Jason A., Regulating an Experience Good Produced in the Formal Sector of a Developing Country when Consumers Cannot Identify Producers (November 24, 2010). Resources for the Future Discussion Paper No. 10-52-REV, Available at SSRN: https://ssrn.com/abstract=1714522 or http://dx.doi.org/10.2139/ssrn.1714522

Timothy J. McQuade

Harvard University - Department of Economics ( email )

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Stephen W. Salant (Contact Author)

University of Michigan ( email )

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Resources for the Future ( email )

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Jason A. Winfree

University of Michigan at Ann Arbor ( email )

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