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

15 Pages Posted: 20 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

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Date Written: November 2012

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. This pape assumes 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. This paper also assumes 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 profitable. Using this model, we demonstrate how regulations in the formal sector can lead to a quality gap between formal and informal sector goods. Moreover, the paper investigates how changes in regulation affect quality, price, aggregate production, and the number of firms in each sector.

Suggested Citation

McQuade, Timothy J. and Salant, Stephen W., Regulating an Experience Good Produced in the Formal Sector of a Developing Country When Consumers Cannot Identify Producers (November 2012). Review of Development Economics, Vol. 16, Issue 4, pp. 512-526, 2012, Available at SSRN: https://ssrn.com/abstract=2164052 or http://dx.doi.org/10.1111/rode.12001

Timothy J. McQuade (Contact Author)

Harvard University - Department of Economics ( email )

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Stephen W. Salant

University of Michigan ( email )

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Resources for the Future ( email )

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