Job Market Paper

There exists a plethora of food product labels for credence attributes (e.g., organic, cruelty-free, local) with associated standards. However, to what extent are the underlying production standards optimal? For example, in the United States, land must be treated organically for three years before crops can be considered for organic certification. In California, Proposition 12 mandates that certain pigs be afforded at least 24 square feet of floor space. Why do policymakers not require land be treated for only 35 months or why not require at least 25 square feet of floor space? My job market paper addresses this question.

I outline a economic model that combines a classic Mussa-Rosen market structure with a Cobb-Douglas benefit function to study the optimality of credence good production standards. In addition to outlining a general model, I provide an application to California’s organic strawberry industry with respect to the use of organic strawberry seedlings. While the National Organic Program (NOP) mandates the use of organic seedlings, a loophole called the `Commercial Availability Clause’ (CAC) allows for organic strawberry acres to be planted with non-organic seedlings; roughly 85 percent of California’s organic strawberry acres utilize this loophole. The use of non-organic seedlings in organic strawberry production means that consumers may not get what they think they are purchasing – even if it is the industry standard.

To calibrate my model, I use proprietary data that I collected from a large strawberry producer. Assuming organic strawberry seedlings have a cost premium of $0.195 per plant (4.5 percent of retail organic strawberry price per pound in 2021) and consumers are largely unaware if policy changes, demand for organic strawberries is estimated to shrink by 13 percent; industry production costs are also estimated to increase by $20.1 million per year if the loophole is closed. Since many consumers operate under misperceptions of what exactly ‘organic’ entails, it may also be that consumers do not sufficiently value the use of organic seedlings, leading to lower-than-expected willingness to pay for the organic variety. Compounded with the imperfect diffusion of information, closing the CAC loophole is almost always a welfare-reducing proposition, even when accounting for the environmental benefit from organic production, relative to conventional.