Daniel Gilligan (IFPRI): “Subsidies and Product Assurance: Evidence from Agricultural Technologies”

Abstract:
Markets for credence goods – goods for which quality is difficult to observe both ex-ante and ex-post – are plagued with information asymmetries whereby low-quality products are sold alongside high-quality products at similar prices. Firms cannot signal the quality of their products, and consumer demand is low. Widely used subsidies for agricultural technologies have often failed to improve adoption and profitability because many agricultural technologies are credence goods. We study the effects of a product assurance scheme in Uganda that introduced branded package labels for hybrid maize seed, a credence good. Using a market-level randomized control trial, we identify the effects of a subsidy provided to farmers exposed to the product assurance scheme on three market outcomes: hybrid maize demand, price, and quality. Adoption of hybrid maize increases by 44 percent due to the subsidy, with increased demand for both labeled and unlabeled hybrid maize. Prices and quality of both labeled and unlabeled hybrid maize also increase in treated markets. Additionally, both quality and prices are higher for labeled goods than unlabeled goods in all markets, indicating the emergence of a separating equilibrium that allowed high-quality firms to distinguish their products. We find evidence of market changes on the extensive margin rather than the intensive margin, with fewer hybrid maize varieties available in subsidy markets and poorer-quality products exiting the market. The results suggest that, when combined with a quality signal delivered through a low-cost product assurance scheme, a temporary subsidy increases technology adoption and improves average product quality for credence goods.