Optimal Policy Response to Food Fraud

Abstract

This study analyzes the optimal response of the government to food fraud while accounting for the asymmetric effects of food fraud on consumers and producers, the endogeneity of the producer quality choice, and asymmetries in the probability of food fraud detection. While the government can, theoretically, deter food fraud through a significant increase in the certification costs and/or the monitoring-punishing system, the analysis shows that the optimal policy response depends on the efficiency of dishonest producers, the type of food fraud, the political objectives of the government, and the relative costs of different types of enforcement. In addition to accounting for the asymmetric effects of food fraud, the explicit consideration of agent heterogeneity and the endogeneity of the producer quality enables us to show that, contrary to what is traditionally beleived, the effect of enforcement on the purity of labeling and the average product quality depends on the efficiency of dishonest producers. Intriguingly, when the public law enforcement agency officials engage in bribery, the monitoring and punishment system without addressing corruption does not decrease the fraudulent behavior but, instead, increases the incentives to commit fraud.