Using Private Food Safety Standards to Manage Complexity: A Moral Hazard Perspective

By Russo, Carlo; Perito, Maria Angela et al. | Agricultural Economics Review, July 1, 2014 | Go to article overview

Using Private Food Safety Standards to Manage Complexity: A Moral Hazard Perspective


Russo, Carlo, Perito, Maria Angela, Di Fonzo, Antonella, Agricultural Economics Review


(ProQuest: ... denotes formulae omitted.)

1. Introduction

In the last decades, food retailers1 have put considerable effort in establishing sets of contractually-binding rules (the private food safety standards) to ensure the safety of their products, meeting an increasing consumer demand for safe food (Reardon et al. 2001; Henson and Reardon 2005). Retailers adopted strict safety standards to maintain a reputation and avoid possible liability (Henson and Humphrey 2009; Marcoul and Veyssiere 2010). Furthermore, food safety and quality assurance affects the cost of carrying out transactions, providing incentive for adopting voluntary quality assurance systems (Holleran et al. 1999).

This paper investigates the benefits that firms can obtain by adopting private food safety standards (PFSS), in addition to the above-mentioned obvious advantages of ensuring the delivery of safe food. To address the study question we develop a principalagent model focusing on a single transaction between a retailer and a supplier. The retailer buys a product from the supplier and he/she resells it to a consumer. Complexity arises because consumers demand a large bundle of attributes Z including safety, quality and many other dimensions. In order to meet consumer demand and achieve efficiency, the retailer requires that the supplier delivery a bundle of attributes T, including Z and all other attributes that can increase the efficiency of the supply chain. Because some attributes in the set T are not observable, the retailer requires that suppliers adopt a PFSS. The standard monitors a subset XczT of attributes directly, preventing opportunistic behavior with respect to such quality and safety attributes. ' Our objective is to investigate if PFSS can attenuate the opportunism problem with respect to the set T-X of attributes that are not covered by the standard. It is important to stress that the suppliers' opportunism we focus on does not concern the delivery of product attributes that are normed by the PFSS. It may affect any other aspect of the supplier - customer interaction - for example information management, finance or other dimensions of the transactions.

The study question is relevant because transactions along the supply chains are becoming more and more complex (Arshinder et al. 2008). Consumers are attaching new demand to food consumptions and the vector of attributes that they require from the retail industry is increasing in dimension. Similarly, integrated logistics, global sourcing and consumer-oriented supply are associated with more complex supplier-buyer interaction. Modem retailers' supply chains require a high degree of coordination and cooperation among suppliers and customers at all levels to manage such complexity and produce value for consumers and achieve efficiency (e.g. Duffy and Fearne 2004, Goodhue 2011). In this context, opportunistic behavior can be a source of transaction costs and cause a substantial decrease in the gain from coordination (e.g. Loader 1997).

Our key finding is that PFSS can be used strategically to reduce the cost that buyers must bear to ensure that heterogeneous suppliers deliver unobservable attribute set T-X. PFSSs have an indirect effect in improving the efficiency of the buyers' supply chains with respect to aspects that are not directly related to food safety and quality. Such benefit adds up to the direct effect of PFSS, which is the monitoring of quality and safety. Consequently, overlooking the indirect effect might result in an undervaluation of the benefits of PFSSs.

The paper is organized as follows. In section 2 we provide a brief overview of the PFSS and a summary review of related literature. In section 3 we illustrate the theoretical model, and in section 4 we summarize our conclusions.

2. Private Food Safety Standards and supply chain coordination

A PFSS is a set of voluntary rules that are binding under a contractual agreement. These private standards lead retailers to reduce the use of the spot market and establish formalized contractual relationships, as vertical alliances, with the suppliers (GiraudHéraud et al. …

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