Estimating Seed Demand in the Presence of Market Frictions : Evidence from an Auction Experiment in Nigeria

In this paper, we examine how beliefs about seed quality influence bidding behavior and demand for high-quality seed using an information-provision experiment within an incentive-compatible auction mechanism that mimics seed-purchasing decisions in the presence of seed market frictions. We find that most individuals are prone to quality misperception and revise their bids upwards (downwards) in response to positive (negative) quality signals. In addition, by exploiting random variation in cash grants, we show that participants’ bid-revision behavior is unrelated to liquidity constraints and is mostly an informational effect that operates through a quality misperception mechanism. Using a novel nonparametric hypothesis testing procedure, we demonstrate that the provision of information about seed quality does not fully resolve quality misperceptions. We then show that unresolved or persistent misperception is severe enough to distort bidding behavior and ignoring it could lead to biased price premia, market share, and elasticity estimates