Climate Forecasts and Livestock Disease Disclosure: A Shepherd’s Dilemma
نویسندگان
چکیده
We study markets for a good whose safety (the seller’s type), cannot be costlessly observed by the buyer. Using a costly state verification model with inter-temporal correlation in types, we identify contractual arrangements that induce sellers to report unsafe products voluntarily. Perfect, but costly, verification (audits) and an exogenous publicly provided noisy signal (forecast) can provide the buyer with information regarding type. As an application our model explains stylized facts of recent trade disruption caused by African livestock disease as well as providing normative policy prescriptions. Without the forecast, sellers do not reveal product safety without auditing. If audits are too expensive, a pooling equilibrium can occur with unintentional consumption of unsafe goods. Introduction of even an imprecise forecast, however, can lead to perfect identification of unsafe goods by enabling an equilibrium in which sellers voluntarily disclose type without audits. In general, a forecast never harms the buyer, but its effect on sellers is ambiguous. Even if introducing a forecast benefits sellers, they always suffer (and the buyer benefits) from increases in forecast precision. JEL Codes: D82, L15, O13, O19, Q13, Q17
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