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Economics of Assurance: Traceablity, Contracts, Vertical Coordination, Certification, and Asymmetric Information


Consumer demand for food safety and for a wide variety of quality attributes has spurred producers to develop a number of mechanisms for assuring the supply of safety and quality. Contracting, vertical coordination, traceability systems, and third-party certification are all examples of strategies that producers have developed to reduce variability in the supply of safety and quality and to substantiate safety and quality claims. Each of these systems helps to bridge information gaps between growers, processors, manufacturers, and consumers, thereby reducing market inefficiencies that may arise due to asymmetric information. The objective of the Economics of Assurance project is to develop an economic framework for evaluating market and government solutions to problems of asymmetric information in markets for food safety and quality.

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NON-TECHNICAL SUMMARY: The objective of the Economics of Assurance project is to develop an economic framework for evaluating market and government solutions to problems of asymmetric information in markets for food safety and quality.<P>

APPROACH: The project will collect evidence from economic theory and case studies of firms involved with food production, processing, and distribution. Industries from across the food supply system will be surveyed, including those in beef, poultry, egg, grain, fruit, and vegetable production.
PROGRESS: 2001/10 TO 2002/09 </br>
We hypothesized that the U.S. food chain has been rapidly developing significant traceability capability. Private food manufacturers have a number of reasons to develop and adopt traceability systems. Food suppliers may want to establish traceability systems to differentiate and market foods with subtle or hard-to-verify quality attributes, facilitate traceback for food safety and quality issues, and/or to improve supply-side management. Economic incentives--capturing the economic value of providing and assuring quality and safety attributes--appear to be encouraging the private sector to advance traceability technology. Additionally, there have been significant advances in communication technology (widespread use of the Internet is less than 10 years old) which has driven down the cost of information management. To enhance our understanding of the extent and motivation of traceability systems in our food supply, we conducted several informal interviews with growers, food processors, and manufacturers. We have made 3 trips and are planing 1 or 2 more visits to food companies. (We have not exhausted our funding.) We have spoken with executives and quality assurance managers of several small, medium, and large food firms about their traceability programs. Our contacts represent firms that produce the spectrum of foods that we eat - processed foods, meats, fruits, and vegetables. AMS and FSA staff have facilitated our interviews.
IMPACT: 2001/10 TO 2002/09 </br>
Our discussions with industry executives confirm our hypothesis that U.S. food firms have the ability to trace various quality attributes including source of product and can trace back through the food supply issues related to food safety. While the degree of breadth, depth, and precision may vary from industry to industry or across firms within an industry, our food supply system has considerable tracing ability often able to trace back a food product to a processor or group of farmers within 24 hours. In some cases, trace back could take place within minutes. To convey to the public that our food system has this capacity, a capacity that contributes to food security, safety, and distribution efficiency, is an important message of our analysis. We will communicate this information and other more detailed and complex analysis through our presentations and publications.

Golan, Elise; Krissoff, Barry; Kuchler, Fred; Price, Gregory
USDA - Economic Research Service
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