Due to the opening of borders, the growing importance of retail chains combined with an internationalization strategy, changed consumption patterns, as well as a dynamic development of demand, the food system has changed considerably worldwide. Production, processing, and marketing of food have become more and more globalized, which has also changed the global food governance. A growing number of food scandals, however, has made clear that national legislation as well as existent monitoring and inspection systems are not adequate for responding to the new market conditions and protect consumers. Furthermore, private-sector initiatives have gained in importance.
Building on the literature on vertical relations and repeated interactions, a major goal of this task is to analyze whether endogenous mechanisms such as private certification, relational contracts, and reputation building can ensure the supply of safe and sustainable food products meeting consumer preferences. The understanding of the interaction between firms along the food value chains is essential. This is especially true for value chains in which only few firms are active and in which market outcomes are mainly determined by the strategic decisions of dominant firms. Considering asymmetric information and the fact that firms are, in general, not able to perfectly control the quality of their inputs, the interaction between firms along the value chain is further complicated by adverse selection and moral hazard problems. We will theoretically analyze how different certification systems, information requirements and liability standards affect the firms’ incentives to invest in enhanced quality control technologies (or the development of new and safer products), consumer perception and consumption decisions. Additionally, we will analyze how endogenous mechanisms as well as regulatory interventions may shape market structures and equilibrium prices. Specifically, we will focus on food markets where food scares – such as the periodical outbreaks of foodborne illness caused by pathogens – have fueled public concern about food safety. We also intend to complement the theoretical work with structural econometric analyses to provide empirical results that are interpretable through the lens of solid economic theory. One specific application is the analysis of labelled products such as organic or fair trade goods in the coffee market and the sharing of rents along the corresponding value chain.
Furthermore, we will investigate the strategic effects of tightened public regulations on products and services quality. Compliance with standards induce significant additional costs for producers, which can be traced back to the need of (supplementary) quality control technologies such as product inspection and testing, process controls, as well as various audits. For example, the food safety related expenditures for implementing HACCP systems amount to approximately 1% to 7% of the production value. Since these additional production costs are only incurred if production actually takes place, producers bear substantial inframarginal or fixed operating costs when complying with increasingly demanding public or private (quality) standards. We will analyze how those regulation-related fixed costs impact equilibrium contracts and whether they may facilitate the monopolization of an imperfectly competitive downstream market to the detriment of consumers.
Finally, the introduction of process and product standards has consequences for firms along the production chain, in particular so for the predominantly small farms located in third-world countries. The effort and expenditures associated with the introduction of these standards are seen as the main obstacles to access retail chains and international markets. Consequently process and product standards can not only change market structures, they can also substantially affect livelihood in rural areas of developing countries. In this task we will further examine how small agricultural enterprises are affected by the growing food safety requirements in developed countries and what the consequences are for the livelihood situation and the development of rural areas.