Reading: Masters and Sanogo, 2002 in AJAE AGEC 640 – Agricultural Policy September 13, 2018 Nutrition and Food Markets Extra slides on imperfect information & food demand – not delivered in class Reading: Masters and Sanogo, 2002 in AJAE

Now… what else might be useful to understand food intake? Food is a public concern, but it is not a “public good” Food demand generate subtle kinds of market failures One reason is that its benefits are important but often delayed and often not observable, so we have: credit and insurance constraints (the poor can’t borrow) “behavioral” effects (people are predictably irrational) weak self-discipline (addiction, obesity, etc.) distorted perceptions (anxiety, obsession, etc.) asymmetric information (need quality assurance) example of Masters and Sanogo (2002) study of infant foods in Bamako, Mali

Weight-for-height (WHZ) and height-for-age (HAZ) of children in Mali, relative to international norms The most severe nutritional deficits occur in a relatively brief period

Child mortality is closely linked to their weight-for-height Source: Reprinted from Fawzi, W.W., M.G. Herrera, D.L. Spiegelman, A.E. Amin, P. Nestel, and K.A. Mohamed. 1997. “A Prospective Study of Malnutrition in Relation to Child Mortality in the Sudan.” The American Journal of Clinical Nutrition 65(4): 1062-9.

Why are nutritional deficits so severe between 4 and 24 months of age? exposure to disease due to initial introduction of water and solids, or perhaps also more mobility and contact with others; deficits in nutrient intake due to differences between infant and family foods, and failure to provide enough infant-quality foods.

Characteristics of infant foods Infants need foods of higher nutrient density than the family diet, from when they outgrow the nutrients in breastmilk to when they can digest enough of the family diet. High density is obtained from high-cost ingredients (oilseeds or animal products), mixed with low-cost staples (cereal grains, etc.) but parents cannot observe an infant food’s ingredient ratios and density, even after consumption, because other factors affect growth

Economics of credence goods Akerlof (1970) and others: If quality is unobservable, quantity will be… zero! optimizing people will not respond to price … except as remedied by trust in a brand. ==> sellers use advertising and high prices as visible commitments to quality, so buyers must pay a premium over known costs, to buy guaranteed quality, e.g. premiums paid for “brand-name” lawyers, pharmacists, auto mechanics, etc.

Table 1. Infant foods for sale in Bamako, Mali (1999) Brand name Packaging Retail Prices (FCFA/unit)* Mkt. Stores Pharmacy Cérélac (wheat) 400 g. can 1400 1500 1615 Cérélac (wheat) 200 g. box 600 850 Cérélac (rice) 400 g. can 1600 Cérélac (wheat/Banana) 400 g. can 1750 Cérélac (wheat +3 fruits) 400 g. can 2240 Blédilac** (wheat) 250 g. can 1270 Blédina** lactée fruits 250 g. box 1830 Farinor** (maize/soy) 400 g. box 1690 1750  Source: Masters and Sanogo, 2002. MISOLA 500 g. bag 300 UCODAL (e.g. Sinba) 200 g. bag 200  

Economics of credence goods (continued) Akerlof (1970) saw an alternative remedy to lower the cost of credence goods: third-party certification mandatory testing => complete coverage examples: FDA, USDA limitations: tax-funded, incentive for fraud fee-for-service => self-sustaining, self-policing examples: ISO, UL limitations: scale economies, may not emerge spontaneously

Benefits and Costs of Certification in Mali benefits of certification what is food-quality information really worth? do some mothers value information more than others? costs of certification what are set-up and marginal costs? what volume would be certified? net gains from certification do they justify the investment risks? would the program be sustainable?

To detect what certification is worth, we need a experimental economics.. Vickrey (1961) and others: Preference-revealing auctions mimic real markets: price is fixed by others; choice is to accept or decline M&S experiment is aimed at very, very low-income people -- avoids using money, so choice is among infant foods only; avoids calculations, so choice is easy and natural: give mothers a can of Cerelac offer to swap for increasing quantities of substitute products record whether they accept or decline each choice give them one of their choices, selected at random The design is not quite strategy-proof; respondents may hold out for slightly more of each substitute than in ideal auction.

Summary statistics for willingness-to-pay results WTP (FCFA per 400 g.) ave. s.d. min. max. WTP by product 1. Cerelac 1500.00 (market price) 2. Certilac 1159.83 357.77 667 1500 3. Anonymous product 704.59 210.36 462 1500 4. Raw ingredients 119.14 35.07 75 150 WTP for premium for 2 over 3: Certification 455.24 251.22 0 1038 for 3 over 4: Processing 585.45 213.97 312 1425

So certification has large benefits… but what would be its cost? 10 million FCFA/month for advertising 1 m. FCFA/mo. per 50 tests/mo. for staffing 0.6 m FCFA/mo. per 20 tests/mo. for transport 3,520 FCFA/mo. per test for consumables 1,000 x 400g. sold per test done => cost falls below ave. WTP at 30,000 bags/mo. => cost falls below 100 FCFA at 215,000 /mo.

How much food would be certified? 50,000 children aged 6-24 months in Bamako 100 g./day average consumption per child => 8 bags of 400 g. per month low scenario: 39% use (now using Cerelac) high scenario: 89% use (now using any food) => total potential is 155,000 – 350,000 bags/mo.

Would certification’s benefits exceed its costs? Two ways to estimate: (1) Each respondent has a different WTP Some respondents’ WTP below cost Construct demand curves & optimal quantity Find economic surplus (2s) All respondents have identical WTP Average WTP is way above cost Full market size is certified Find total benefits - costs

Estimated certification demand and average-cost curves

Table 3. Consumer surplus and net benefit from certification   Case 1 Case 2 Consumer surplus approach Equilibrium qty. certified (400 g. bags/mo.) 150,000 345,000 Net economic surplus gain (FCFA/month) 51,543,984 134,029,438 Net economic surplus gain (US$/year) 951,581 2,474,390 Cost-benefit analysis approach Total estimated market size (400 g. bags/mo.) 154,746 353,138 Net economic benefit/month (FCFA/month) 51,713,454 132,138,264 Net economic surplus gain (US$/year) 954,710 2,439,476

OK, so quality information is needed… should testing be voluntary or mandatory? Private solutions work if a “certifier” can force users to pay (that is, exclude free-riders), e.g.: Underwriters’ Laboratories (sellers pay for label) Consumer Reports, CarFax (buyers pay each time) and thereby capture enough revenue to pay the cost of obtaining the information; while maintaining a credible quality signal of their own! Often it’s cheaper to use the government: “value capture” from consumers can occur through taxation (e.g. USDA grades) or user fees (e.g. air traffic) quality-destroying competition can be barred by mandatory standards and licensing but the “quality” being upheld may not be valued by consumers; standards may be just an entry barrier to protect insiders

…Some conclusions Food intake decisions involve not only observable attributes (taste, texture, color), but also unobservable qualities and delayed effects. Food choices can be hard to understand using economics on observable prices and quantities only so sometimes we need inferences and experiments but much of the “irrationality” in food consumption can be understood as constrained optimization this allows us to plan public interventions that raise welfare, even though food is not a public good.