Saturday, November 03, 2012

California Proposition 37: Capitalizing on Information Asymmetry and Government Regulation to Corner the Market on Sustainable Food

Proposition 37 is a crystal clear example of rent seeking in the food industry. Some natural and organic and other food special interests are utilizing this legislation to obtain market share that they otherwise would not be able to obtain through the marketplace.  To see this, its important to understand the dynamics of the market for sustainable ag products as it has evolved over the last 15 years.

In the last 10-15 years, modern agriculture utilizing advances in management, information technology, genetics, biotech, and pharmaceutical technologies has closed the sustainability gap between conventional and organic production. (see Modern Sustainable Agriculture). In terms of reduced chemical use, improved biodiversity, reduced pollution and carbon footprint, and overall safety, the biotech industry and modern Ag could pose steep competition for  some natural and organic food producers.

While most members of the agriculture industry don’t think the industry should be defined by an ‘us vs. them’ paradigm, some are willing to exploit consumer fears and asymmetric information by using the government’s regulatory apparatus to get a competitive edge. Some see modern ag as a competitor as opposed to a partner in an overall mission to provide the world with safe sustainable food. Consumer apathy also works against some promoting niche organic and natural markets. Uncaring customers represent lost revenue potential. A scary Hollywood horror movie label like ‘genetically modified’ may be enough to drum up business. How?

The Role of Information Asymmetry

Whenever one party has better information about their product or service than the buying public, information asymmetries may exist.  Proponents of proposition 37 claim that their initiative is to reduce information asymmetry and improve the functioning of markets, as stated in this recent Forbes article:

“Free markets only work when there is transparency and people are able to make decisions based on information, which does not exist in the case of GMOs. If Prop 37 is enacted, and, armed with this information, a significant enough number of consumers decide not to buy these products, the onus will be on the companies to conduct more research and produce better data.”

Will including the words ‘Genetically Modified’  on food labels really serve to inform the public or create more confusion? This form of labeling won’t do any thing to decrease information asymmetry in and of itself. The actual language in the law may in fact make it worse. This is made clear on page 10 of a report by  Northbridge Environmental  Management Consultants (The Genetically Engineered Foods Mandatory Labeling Initiative Overview of Anticipated Impacts and Estimated Costs to Consumers):

"The Genetically Engineered Foods Mandatory Labeling Initiative (A.G. File No. 11-0099 – hereinafter the Initiative) would have a substantial impact on California consumers. The Initiative would change how many of the foods they eat are produced and would make that food more expensive. At the same time, however, the Initiative would provide relative little by way of consistent and useful information to consumers because of the loopholes and exceptions in its language and the uneven ways in which it would apply to the same food consumed in different settings. "

 If informing consumers were the primary goal, then there are much more intelligent ways to do so, perhaps in the ingredients listing following industry standards (instead of using ‘genetically modified' if a product contains GMO corn, list instead ‘rCORN’, an idea I reluctantly entertain here) If it alarms otherwise apathetic consumers, are they really going to invest the time researching the safety of biotech foods  to close the information gap or are they going to turn to the unqualified opinions of celebrities like Dr. Oz or Oprah?  I would bet that the special interests are counting on consumers weighing heavily the opinions of celebrities and conspiracy theorists, and therefore letting the information asymmetries associated with biotech direct them to their own products.  In this way, Prop 37 is specially designed by special interests to take advantage of information asymmetries and exploit the fears of the public in an effort to drive market share.


Here is a link to a great interview from Berkeley professor of Molecular and Cell Biology Michael Eisen via the Foodstuff's FoodLink Food and Farm Podcast with Ray Bowman that highlights the information asymmetry, special interests, trivialization of science, and near conspiracy theory aspects of  Proposition 37. 

See also, Eisen's piece 'Prop 37 and the Right to Know Nothing.'