Using Private Food Safety Standards to Manage Complexity: A Moral Hazard Perspective

Private food safety standards (PFSS) are widely adopted by firms in the agro-food system, as they meet an increasing consumer demand for safety and quality. Yet, recent economic literature found that PFSS might serve other purposes than just ensuring food safety. Our paper contributes to this literature, framing PFSS within a contract-theory model. We conclude that PFSS can be used to lower the coordination costs along the supply chain and that their effects go beyond ensuring the production of quality and safety attributes. The model shows that PFSS can reduce the cost of solving moral hazard problems for non-discriminating buyers facing heterogeneous suppliers. Noticeably, the opportunism may concern any of the many dimensions of the transaction, without being limited to the production of quality or safety attributes that are normed by the standard. The optimal strategy requires that the supplier’s adoption cost of the standard must be a non-negligible specific investment. This condition explains why we observe PFSS that are heterogeneous (i.e., the certification cannot be used in other transaction freely) and much more rigorous than public regulations (i.e., they require incremental costs).