Academic journal article Journal of Agricultural and Resource Economics

Do Inspection and Traceability Provide Incentives for Food Safety?

Academic journal article Journal of Agricultural and Resource Economics

Do Inspection and Traceability Provide Incentives for Food Safety?

Article excerpt

One of the goals of inspection and traceability is to motivate suppliers to deliver safer food. The ability of these policies to motivate suppliers depends on the accuracy of the inspection, the cost of failing inspection, the cost of causing a foodborne illness, and the proportion of these costs paid by the supplier. We develop a model of the supplier's expected cost as a function of inspection accuracy, the cost of failure, and the proportion of the failure cost that is allocated to suppliers. The model is used to identify the conditions under which the supplier is motivated to deliver uncontaminated lots. Surprisingly, our results show that when safety failure costs can be allocated to suppliers, minimum levels of inspection error are required to motivate a supplier to deliver uncontaminated lots. This result does not hold when costs cannot be allocated to suppliers. As a case study, we use our results to analyze the technical requirements for suppliers of frozen beef to the USDA's Agricultural Marketing Service.

Key words: diagnostic error, food safety, inspection, sampling error, traceability

Introduction

One of the objectives of inspection and traceability systems is to improve the safety of the food supply. Inspection systems use sampling and testing to collect information about safety and quality. Buyers use the results of inspection to decide whether or not a supplier's product is safe enough to buy. Traceability systems accumulate information about product attributes, including safety and origin, as the product moves through the supply chain. Traceability systems are defined by the breadth, depth, and precision of the accumulated information. The breadth of the information refers to the variety of the product attributes that are monitored, the depth of the information refers to how far the accumulated information moves through the supply chain, and the precision of the information refers to its specificity and accuracy (Golan et al., 2004).

The information generated by inspection and traceability systems does not, by itself, lead to an improvement in food safety. To influence food safety, the information must be used to remove unsafe food that is already in the supply chain, or to prevent unsafe food from ever entering the supply chain. In this analysis, we focus on how these systems prevent unsafe food from entering the supply chain by motivating suppliers to produce and deliver safer food. Inspection systems motivate suppliers by generating a significant cost when a lot fails inspection and must be scrapped. Traceability systems motivate suppliers by making it possible to allocate the cost of unsafe food to the source. Not every unsafe lot that passes inspection will cause an illness, but when it does, the cost of illness associated with contaminated food can be significant. Without inspection, unsafe food can enter the supply chain unhindered and, without traceability, the supplier responsible for unsafe food cannot be identified.

Improving food safety is only one of the reasons to employ a traceability system. Hobbs (2004) identifies three distinct functions for traceability in a food supply chain: (a) as a reactive traceback mechanism when contamination problems occur (externality cost-reduction function), (b) to strengthen liability incentives (liability function), and (c) to verify credence quality attributes (ex ante quality verification). Here, we consider only the liability function of the traceability system. As this analysis will show, the liability function of a traceability system is not always effective in providing incentives to supply safer food. Even if the liability function is ineffective, the traceability system's other functions may be performing adequately.

The power of inspection and traceability to motivate a supplier depends on inspection accuracy. Inspection is, unfortunately, subject to at least two kinds of error. Diagnostic error occurs when samples are incorrectly diagnosed, and sampling error occurs when a sample is not representative of the lot from which it is drawn. …

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