Economics of Food Chain Coordination and Food Safety Standards: Insights from Agency Theory
Over the past three decades, food markets became increasingly integrated, and contracts between upstream suppliers and downstream manufacturers, retailers, and food service business are increasingly the norm. Economic theory suggests that integrated companies will have fewer foodborne illness outbreaks, since these integrated companies have more control over their supply chain from farm to table. Yet, despite this change in global market structure, there have been many food safety outbreaks in the last decade. The prevention and mitigation of these outbreaks were significantly undermined by the existence of information failures, even within a single company. This chapter introduces agency theory, an economic framework that helps understand the role of information on the vertical contractual relations in the food supply chain. The change in economic incentives under different contract situations is explored. We further discuss how this framework can be used to examine alternative public policies and private strategies to improve supply chain coordination and reduce food safety risks, against some standard established either by the private sector or by government agencies.
KeywordsFood safety Economics of information Agency theory Contracting Global Food Safety Initiative
British Retail Consortium
Food and Agriculture Organization/UN
Food Safety System Certification
Good Agricultural Practices
Global Food Safety Initiative
Hazard Analysis Critical Control Point
International Features Standard
Safe Quality Food
I am very grateful to Derrick Jones and Tanya Roberts for giving me the opportunity to write this chapter as well as for their helpful comments and encouragement. Derrick also gave me great suggestions on how to simplify the technical language and very helpful editorial suggestions. I am particularly in debt to Tanya for challenging me to reflect how agency theory related to private food safety standards. Sterling Andrew Starbird, with whom I learned about the application of agency theory to the economics of food safety, generously offered to revise an early draft and provided inestimable insights and comments. I am particularly thankful for his suggestions and corrections to the second section of this chapter. Any remaining errors, mistakes, or omissions are of course my own.
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