This paper considers genetically modified (GM) seed adoption decisions by farmers in a developing country under two alternative information regimes (with and without perfect information regarding production conditions) that allows the monopolist producer of GM seeds to either practice perfect discrimination or uniform pricing. Under each regime we analyze two scenarios: when the government can and cannot credibly commit to the announced form of welfare enhancing intervention in the domestic seed market. We show that the optimal policy under either information regime is to subsidize the price of conventional seeds. The optimal size of the conventional seed subsidy depends systematically, in turn, on the (i) marginal cost of GM and conventional seeds, (ii) price of chemical pesticides, (iii) degree to which GM seeds increase productivity, (iv) range of pest pressure among farmers, and (v) intensity of seed usage (GM and conventional). Nonetheless, our findings pinpoint time-inconsistency of government policies as a possible reason for sub-optimal coverage of GM seeds in developing countries.
展开▼
