Quality Incentives in Informal Markets: The Case of Ecuadorian Cocoa
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We investigate the economic importance of implicit quality incentives in an agricultural market
that lacks the institutional capacity for measuring quality verifiably. We measure the magnitude
of implicit price premiums for quality, and we distinguish empirically between hedonic-pricing
and implicit-contracting motivations for observed incentives. We find price premiums
comparable in magnitude to premiums observed in other agricultural markets where quality is
measured verifiably. Premiums are highest for relatively low-value but highly-informative
quality characteristics, and buyers who are informationally close to farmers implicitly reward
actions that affect unobservable quality characteristics. We conclude that implicit contracting is
used to provide quality incentives comparable in magnitude to what is provided through more
explicit means in formally organized markets.