Private standards and producer risk: a framework for analysis of development implications*[The market for lemons: quality uncertainty and the market mechanism]

The effect of risk aversion on farmer certification to standards is analysed by considering an industrial organisation model of differentiated exchange of high- and low-quality products between farmers, intermediaries and consumers. In the presence of uncertainty over the proportion of their produce that will be rejected by consumers, a relatively risk-averse population of farmers in an export enclave will tend to adopt a high-quality standard in greater numbers. When some producers export and some produce for domestic markets, however, relatively risk-averse farmers find the low-quality standard most appealing. The relationship between risk and standard adoption is affected by market conditions including the rejection rates of produce, profit margins and the extent of demand differentiation between the two varieties.