International supply chains in the food industry have lengthened in recent years and new sources of risk have arisen. With increased consumers' incomes, perceptions about food safety have become sharper and food safety has become an important issue in public policy both domestically and internationally. The safety of food is a credence characteristic which gives rise to a particular form of market failure involving either asymmetric information and moral hazard or symmetric imperfect information. An example from a recent experience in the UK was used to illustrate the issue of moral hazard, as well as the possible responses to it. A partial equilibrium model of an open economy was developed to investigate how the moral hazard problem that is caused for importing firms by the actions of exporting firms could be solved by the market rather than by government intervention.
Food safety, credence characteristic, moral hazard, international trade
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