Food Safety Economic Theory Research

This paper aims to construct a frame based on economic theory for explaining the interesting phenomena in China’s food safety area. We first introduce the concept of’credence goods of food-safety type’, and distinguish it from the traditional ’experience goods’and’credence goods of expert-service type’.Based on this concept, we construct a multi-period purchase frame to model the economic behaviors of food firms and consumers. In this frame, the quality (safety) defect in products can only be revealed imperfectly after the first period by the external inspection agencies. Using this method, we provide an explanation for several phenomena in China’s food safety area.First, by taking into account the probability that the quality defect will be exposed, we construct a signaling model for the credence goods of food-safety type and obtain the conditions for both the separating equilibria and the possibly co-existing pooling equilibria. Our results suggest that the high quality producer will be encouraged to signal its type if the income of certain consumer group is increased or the regulation is strengthened significantly provided that the income of such group is high enough. When the ratio of the high-income consumer group is small, the high quality producer will be encouraged to signal its type if the consumers’confidence in quality is improved significantly provided that the income of the low income group is high enough. Separation will not necessarily take place when the regulation and consumers’confidence are just moderately improved. Therefore, the public voice of ’strengthen the regulation and recover the consumers’confidence’should be treated prudently.Second, from a technological and informational perspective, we give an explanation for the ignorance of quality control and the inclination for the big sales in food industries, especially in the dairy industry. We show that the competition pressure is not the crucial reason. If the market is large enough and the capacity of high quality goods under low investment is relatively small, firms are not willing to make enough investment in the quality control and are inclined to set low price for big sales, which would be viewed by consumers as an imperfect signal of high investment. To strengthen the supervising will not change the’insufficient investment and big sales’status, but will increase the probability of high investment and therefore improve the quality on average.Third, by using a two-period model with both adverse selection and moral hazard, we give an explanation for’the crisis of trust’ in the domain food industry. We show that lack of trust in the government and the incompleteness in the inspection coverage of media are the cause of this crisis. If the ratio of immoral firms is high, those chasing profits, who would have provide safe goods without the asymmetric information, will imitate their bad competitors’behavior and produce unsafe goods. Meanwhile, consumers will not trust the survivors in the crisis. It is more important to expand the inspection coverage that to improve the testing technology for solving the crisis of trust.Based on the analysis above, we examine the inspection coverage and testing level in China’s current governing system of food safety. We show that in the current system the two indexes are both low. This implies that it is important to reconstruct our food-safety governing system to realize a wide coverage and high trust inspection with all parts relevant participating.