Information asymmetry and traceability incentives for food safety

We define traceability by its precision that is the probability of finding the source of a problem. We consider a downstream food processor firm (principal) that sets traceability precision and contingent payments so to induce homogeneous upstream suppliers (agents) to exert the principal's preferred level of food safety effort. We focus on cases in which food safety crises originate from defects in raw material provided by upstream firms to analytically show that high precision can substitute for high intensive contingent payments and vice-versa, and thus traceability is not an unequivocal signal for safer food. Contrary to previous results in the literature, we also show that government regulation based on mandatory traceability with sanctions may not necessarily lead to safer food, while increasing the food processor's costs. Finally, we use our analytical results to give managerial feedbacks for firms adopting and considering traceability. (c) 2012 Elsevier B.V. All rights reserved.