In the first essay, experience and credence food safety attributes are compared using a game theory model. In order to convert an asymmetric information problem into one of cost, a verification process is explicitly introduced in the credence attribute case. With this refinement market solutions other than information-based policies such as labeling are appropriate. For many food safety applications experience and credence attributes can be combined leading to market-based solutions to the under provision of food safety.
The second essay measures the cost impact of food safety regulation using an output directional distance function. Food safety regulation results in the restriction of the disposability of food safety hazards (internalization of social costs) leading to potential output loss through the reallocation of productive inputs to reduce food safety hazards. Using 1997 US Census and food safety recall data, the value of potential output loss due to regulation in the meat and poultry industry is suggested to be $2.5 billion. This value should be considered in future cost analyses of food safety regulation in addition to traditional compliance cost estimates.
The third essay deals with two related topics on food safety regulation. In the first half, accounting for heterogeneous firms with varying effectiveness in risk control, the voluntary approach to food safety programs is questioned. Applying robust comparative statics to a game-theoretic model to characterize the strategies of a regulator and firms, it is shown that less efficient firms are less likely to participate in a voluntary food safety program. Such an adverse selection problem leads to lower overall risk control, suggesting the need for a separating equilibrium providing varying incentives based upon firm type instead of a pooling equilibrium via lump-sum incentives.
The second half compares performance and process standards modeling the variability of industry-level compliance and therefore the resultant level of food safety. Monte Carlo simulations are conducted manipulating five factors: the variances of input use of efficient and inefficient firms, the proportion of inefficient firms in the industry, the mean of the error term for inefficient firms, and the regulator's level of risk aversion. Results suggest that process standards may be preferred over performance standards under certain conditions.