A Market for Lemons: Maize in Kenya*

Information asymmetries are a well-recognized impediment to market efficiency. When quality is not observable by prospective buyers, the quality of marketed goods will suffer, and the volume of trade will be depressed. Using data from more than 2,000 maize samples collected in four Kenyan provinces, we show that the presence of aflatoxin, an invisible and dangerous fungal contaminant, is not reflected in maize prices but does affect how maize is used. Specifically, the level of contamination with aflatoxin is higher in grain that is used for production of alcoholic beverages or sold compared to that which is retained by farmers for their own consumption. We argue that this apparent market failure reduces the quality of maize available on the market. In addition, it may increase farmers’ reliance on subsistence crops relative to higher-value cash crops, thus reducing farm incomes. JEL codes: O12, O13, O15