Firm turnover under asymmetric information: Tanzania's agro‐dealer sector

Abstract We study firm turnover (i.e., entry and exit) and its consumer implications in a market characterized by asymmetric information. Using a three‐round census of agro‐dealers in Tanzania's Morogoro Region, we document annual firm entry and exit rates of 33% and 17%, respectively. These rates are more than double those observed for non‐agricultural micro‐, small‐, and medium‐enterprises in comparable low‐income countries. To analyze how these high rates of entry and exit affect consumers, we develop a theoretical model of firm turnover under asymmetric information and empirically test its predictions for farmers. We find that farmers' market‐level beliefs about agricultural input quality are systematically related to agro‐dealer turnover, with the relationship depending on farmers' prior perceptions of market quality. Farmers report more favorable beliefs about agricultural input quality in markets with recent agro‐dealer exits, consistent with our model when consumers perceive exiting firms as having sold low‐quality products. In contrast, farmers who usually purchased agricultural inputs from the same agro‐dealer expect new market entrants to provide lower‐quality agricultural inputs, suggesting farmers rely on incumbent relationships to manage quality uncertainty in markets with information asymmetries. As a result, agro‐dealer turnover may shape and even attenuate farmers' technology adoption.