Quality and Grading Risk
18 Pages Posted: 6 Mar 2011
Date Written: April 18, 2001
Processors, packer-shippers, integrators, and a variety of third-parties engage in a wide variety of different kinds of grading, intended to summarize quality characteristics of different kinds of foodstuffs. There are two ways in which these grading characteristics may be imperfect. First, they may fail to perfectly capture the variation in quality experienced by the eventual consumer; or second, may fail to perfectly reflect investments made by the producer to improve quality. Either (or both) of these kinds of imperfections has implications for prices, investments, consumer welfare, and contracts between producers and intermediary firms. In this chapter we explore possible consequences of imperfect grading, with selected illustrations for a variety of different commodities.
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