Genetically Modified Organisms: Rights To Use Commodity Names and the Lemons Problem

Genetically modified crops have met some consumer opposition domestically and abroad. This opposition has resulted in variety market and policy reactions with a large potential to disrupt trade and to become a focus of international negotiations. In this paper we consider the spillover from adopters to the non-adopters and non-consumers of GM technology. In the absence of any (organizational) transaction costs the assignment of property right to use the name corn will result in Pareto improving decisions with respect to the introduction of GM technology. However, in the presence of transaction costs the ability to use generic crop names such as corn, the adopters of GM technology have the implicit right and will impose costs on participants in the non-GM marketing channel, by creating a lemons problem. This assignment of property rights can result in the commercial introduction of GM despite potential losses in overall social welfare. If the property rights are reassigned such that the innovators are forced to segregate their GM products through labeling laws, this preempts welfare decreasing technology introduction. The relative efficiency of either allocation of property rights depends on the cost savings, rate of adoption, segregation costs, and consumers’ preference for the GM crop in question. This suggests that assignment of property rights may be more effective if done on a case-by-case basis rather than a one size fits all policy.