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

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  • McQuade, Timothy
  • Salant, Stephen W.
  • Winfree, Jason

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

Suggested Citation

  • McQuade, Timothy & Salant, Stephen W. & Winfree, Jason, 2010. "Regulating an Experience Good Produced in the Formal Sector of a Developing Country when Consumers Cannot Identify Producers," RFF Working Paper Series dp-10-52-rev, Resources for the Future.
  • Handle: RePEc:rff:dpaper:dp-10-52-rev
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    References listed on IDEAS

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    1. McQuade, Timothy & Salant, Stephen W. & Winfree, Jason, 2016. "Markets with untraceable goods of unknown quality: Beyond the small-country case," Journal of International Economics, Elsevier, vol. 100(C), pages 112-119.
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    Cited by:

    1. Jason A. Winfree, 2023. "Collective reputation and food," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 45(2), pages 666-683, June.

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    More about this item

    Keywords

    experience good; formal sector; informal sector; quality;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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