Wastewater irrigation, unobservable food quality and the efficiency of local food markets

Michael F. Gengenbach and Hans-Peter Weikard

European Review of Agricultural Economics, 2010, vol. 37, issue 1, 27-49

Abstract: Food irrigated with untreated wastewater is considered low quality because of health hazards that they can produce. When consumers cannot distinguish food qualities, asymmetric information threatens the efficiency of local food markets. We examine in a sequential game whether prices can credibly signal quality when farmers face production constraints due to the allocation of scarce water. Besides inefficient pooling equilibria and separating equilibria with distorted prices, we surprisingly find efficient equilibria with undistorted prices if the water allocation to wastewater irrigated agriculture is large. We conclude that water allocation may have a crucial impact on the functioning of the market. Oxford University Press and Foundation for the European Review of Agricultural Economics 2009; all rights reserved. For permissions, please email journals.permissions@oxfordjournals.org, Oxford University Press.

Date: 2010
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