Contract Selectivity, Food Safety, and Traceability
S. Andrew Starbird
Santa Clara University - Department of Operations Management & IS
Kansas State University - Department of Agricultural Economics
Journal of Agricultural & Food Industrial Organization, Vol. 5, No. 2, Article 2, 2007
Contracts are an increasingly common method for coordinating exchange in the food industry. Contracts often include specifications for product attributes including food safety. One of the goals of explicit safety specifications is to discourage or deter suppliers who would deliver unsafe food. In this article, we use a principal-agent model in the context of adverse selection to examine how contracts that include traceability can be used to select against producers who cannot meet a processor's safety specifications. We find that the motivation to select against unsafe producers depends on the magnitude of the failure costs and the proportion of the failure costs allocated to producers. We also identify the conditions under which the processor selects against unsafe producers regardless of traceability. Our results are important to regulators and negotiators who want to support safe producers and deter unsafe producers.
Keywords: contracts, food safety, traceability
JEL Classification: Q13, L14working papers series
Date posted: May 17, 2006
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