Economics of Information and Incentives in Regulation of Market Failure

Dagim Gashawtena Belay

Economics of Information and Incentives in Regulation of Market Failure

Abstract

The economics literature identifies externalities, asymmetric information and public goods as the most pervasive sources of market failure, which call for interventions in some form to attain socially optimal outcomes. This thesis consists of four stand-alone papers and aims to address regulation issues of market failure (negative externality and asymmetric information) in two broad areas: antibiotic use and commodity markets. In particular, the thesis investigates the following regulations: (i) when there is a negative externality of resistance because farmers do not internalize the social costs of their antibiotic consumption; (ii) when the farmer has better knowledge about the abatement cost of his antibiotic use than the regulator; (iii) when society learns about farmers’ antibiotic use, which is otherwise undisclosed information, through information disclosure; and (iv) when there is asymmetric crop price information between farmers and buyers or intermediaries. Using theory and empirics based on quasiexperiments, the first theme consists of three papers that evaluate the impacts of existing regulatory interventions, i.e., information disclosure and the Danish yellow card initiative (antibiotic input control), and suggests an incentive mechanism to address information asymmetry (and externality) in regulating antibiotic use in agriculture. The second theme empirically examines output responses to accessing price information. The thesis reveals four main findings. First, without influencing their survival in the market, information disclosure reduces farmers’ subsequent antibiotic use and induces a prosocial input substitution in terms of an increase in vaccine purchases. Second, input control as in the yellow card initiative reduces farmers’ profit and increases their operating expenses, and farmers are not spending more labor hours and money on biosecurity measures; instead, an increase in input costs interms of veterinary medical expenses and feed costs, combined with reductions in technical efficiencies, might have driven the reduction in profit. The results indicate that an isolated stringent regulation of antibiotics could undermine the policy incentive for efficiency in the short run. Labeling schemes could help to internalize the additional costs that such regulations may impose. Third, simulation results based on Danish data show that Montero-type auctioning of antibiotic use rights can be adapted to address asymmetric information infarmers’ abatement costs and ensure socially optimal use of antibiotics while improving welfare. Fourth, access to price information increases farm gate prices and the share of land allocated to traded commodities at the Ethiopian Commodity Exchange (ECX), raising theproduction and output share of ECX-traded commodities. The thesis concludes that information and market incentives provide powerful ways of encouraging individuals towards prosocial (reduction of antibiotic use) and productive (marketable crop choice) behaviors in the presence of market failure.

Original language	English

Publisher	Department of Food and Resource Economics, Faculty of Science, University of Copenhagen
Publication status	Published - 2017

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Cite this

@phdthesis{62cf3010ad7741f89d98b3d9ecb3f3df,

title = "Economics of Information and Incentives in Regulation of Market Failure",

abstract = "The economics literature identifies externalities, asymmetric information and public goods as the most pervasive sources of market failure, which call for interventions in some form to attain socially optimal outcomes. This thesis consists of four stand-alone papers and aims to address regulation issues of market failure (negative externality and asymmetric information) in two broad areas: antibiotic use and commodity markets. In particular, the thesis investigates the following regulations: (i) when there is a negative externality of resistance because farmers do not internalize the social costs of their antibiotic consumption; (ii) when the farmer has better knowledge about the abatement cost of his antibiotic use than the regulator; (iii) when society learns about farmers{\textquoteright} antibiotic use, which is otherwise undisclosed information, through information disclosure; and (iv) when there is asymmetric crop price information between farmers and buyers or intermediaries. Using theory and empirics based on quasiexperiments, the first theme consists of three papers that evaluate the impacts of existing regulatory interventions, i.e., information disclosure and the Danish yellow card initiative (antibiotic input control), and suggests an incentive mechanism to address information asymmetry (and externality) in regulating antibiotic use in agriculture. The second theme empirically examines output responses to accessing price information. The thesis reveals four main findings. First, without influencing their survival in the market, information disclosure reduces farmers{\textquoteright} subsequent antibiotic use and induces a prosocial input substitution in terms of an increase in vaccine purchases. Second, input control as in the yellow card initiative reduces farmers{\textquoteright} profit and increases their operating expenses, and farmers are not spending more labor hours and money on biosecurity measures; instead, an increase in input costs interms of veterinary medical expenses and feed costs, combined with reductions in technical efficiencies, might have driven the reduction in profit. The results indicate that an isolated stringent regulation of antibiotics could undermine the policy incentive for efficiency in the short run. Labeling schemes could help to internalize the additional costs that such regulations may impose. Third, simulation results based on Danish data show that Montero-type auctioning of antibiotic use rights can be adapted to address asymmetric information infarmers{\textquoteright} abatement costs and ensure socially optimal use of antibiotics while improving welfare. Fourth, access to price information increases farm gate prices and the share of land allocated to traded commodities at the Ethiopian Commodity Exchange (ECX), raising theproduction and output share of ECX-traded commodities. The thesis concludes that information and market incentives provide powerful ways of encouraging individuals towards prosocial (reduction of antibiotic use) and productive (marketable crop choice) behaviors in the presence of market failure.",

author = "Belay, {Dagim Gashawtena}",

year = "2017",

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publisher = "Department of Food and Resource Economics, Faculty of Science, University of Copenhagen",

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AU - Belay, Dagim Gashawtena

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N2 - The economics literature identifies externalities, asymmetric information and public goods as the most pervasive sources of market failure, which call for interventions in some form to attain socially optimal outcomes. This thesis consists of four stand-alone papers and aims to address regulation issues of market failure (negative externality and asymmetric information) in two broad areas: antibiotic use and commodity markets. In particular, the thesis investigates the following regulations: (i) when there is a negative externality of resistance because farmers do not internalize the social costs of their antibiotic consumption; (ii) when the farmer has better knowledge about the abatement cost of his antibiotic use than the regulator; (iii) when society learns about farmers’ antibiotic use, which is otherwise undisclosed information, through information disclosure; and (iv) when there is asymmetric crop price information between farmers and buyers or intermediaries. Using theory and empirics based on quasiexperiments, the first theme consists of three papers that evaluate the impacts of existing regulatory interventions, i.e., information disclosure and the Danish yellow card initiative (antibiotic input control), and suggests an incentive mechanism to address information asymmetry (and externality) in regulating antibiotic use in agriculture. The second theme empirically examines output responses to accessing price information. The thesis reveals four main findings. First, without influencing their survival in the market, information disclosure reduces farmers’ subsequent antibiotic use and induces a prosocial input substitution in terms of an increase in vaccine purchases. Second, input control as in the yellow card initiative reduces farmers’ profit and increases their operating expenses, and farmers are not spending more labor hours and money on biosecurity measures; instead, an increase in input costs interms of veterinary medical expenses and feed costs, combined with reductions in technical efficiencies, might have driven the reduction in profit. The results indicate that an isolated stringent regulation of antibiotics could undermine the policy incentive for efficiency in the short run. Labeling schemes could help to internalize the additional costs that such regulations may impose. Third, simulation results based on Danish data show that Montero-type auctioning of antibiotic use rights can be adapted to address asymmetric information infarmers’ abatement costs and ensure socially optimal use of antibiotics while improving welfare. Fourth, access to price information increases farm gate prices and the share of land allocated to traded commodities at the Ethiopian Commodity Exchange (ECX), raising theproduction and output share of ECX-traded commodities. The thesis concludes that information and market incentives provide powerful ways of encouraging individuals towards prosocial (reduction of antibiotic use) and productive (marketable crop choice) behaviors in the presence of market failure.

AB - The economics literature identifies externalities, asymmetric information and public goods as the most pervasive sources of market failure, which call for interventions in some form to attain socially optimal outcomes. This thesis consists of four stand-alone papers and aims to address regulation issues of market failure (negative externality and asymmetric information) in two broad areas: antibiotic use and commodity markets. In particular, the thesis investigates the following regulations: (i) when there is a negative externality of resistance because farmers do not internalize the social costs of their antibiotic consumption; (ii) when the farmer has better knowledge about the abatement cost of his antibiotic use than the regulator; (iii) when society learns about farmers’ antibiotic use, which is otherwise undisclosed information, through information disclosure; and (iv) when there is asymmetric crop price information between farmers and buyers or intermediaries. Using theory and empirics based on quasiexperiments, the first theme consists of three papers that evaluate the impacts of existing regulatory interventions, i.e., information disclosure and the Danish yellow card initiative (antibiotic input control), and suggests an incentive mechanism to address information asymmetry (and externality) in regulating antibiotic use in agriculture. The second theme empirically examines output responses to accessing price information. The thesis reveals four main findings. First, without influencing their survival in the market, information disclosure reduces farmers’ subsequent antibiotic use and induces a prosocial input substitution in terms of an increase in vaccine purchases. Second, input control as in the yellow card initiative reduces farmers’ profit and increases their operating expenses, and farmers are not spending more labor hours and money on biosecurity measures; instead, an increase in input costs interms of veterinary medical expenses and feed costs, combined with reductions in technical efficiencies, might have driven the reduction in profit. The results indicate that an isolated stringent regulation of antibiotics could undermine the policy incentive for efficiency in the short run. Labeling schemes could help to internalize the additional costs that such regulations may impose. Third, simulation results based on Danish data show that Montero-type auctioning of antibiotic use rights can be adapted to address asymmetric information infarmers’ abatement costs and ensure socially optimal use of antibiotics while improving welfare. Fourth, access to price information increases farm gate prices and the share of land allocated to traded commodities at the Ethiopian Commodity Exchange (ECX), raising theproduction and output share of ECX-traded commodities. The thesis concludes that information and market incentives provide powerful ways of encouraging individuals towards prosocial (reduction of antibiotic use) and productive (marketable crop choice) behaviors in the presence of market failure.

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M3 - Ph.D. thesis

BT - Economics of Information and Incentives in Regulation of Market Failure

PB - Department of Food and Resource Economics, Faculty of Science, University of Copenhagen

ER -

Economics of Information and Incentives in Regulation of Market Failure

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