Grading error reduces grower incentives to increase prune quality

Abstract

Grading is important to ensure the production of high-quality foods, but it is usually done with error, distorting market signals and diminishing incentives to produce high-quality products. Size is the main quality criterion for dried prunes and the crucial characteristic in determining prune value. We studied the economic effects of errors in commodity grading, focusing in particular on the implications of one-way (asymmetric) grading errors, namely when small, low-quality product is erroneously classified as high quality, but not vice versa. In an application to the California prune industry, we estimated the extent to which large prunes are undervalued and small prunes are overvalued. We conclude that grading error means that prunes graded as high-quality may not really be high-quality prunes. The presence of these incorrectly graded prunes depresses the prices that growers are paid for high-quality prunes and increases the net returns for small prunes. As a result, growers face reduced incentives to produce larger prunes.