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Inspections and Information Disclosure: Quality Regulations with Incomplete Enforcement

Author

Listed:
  • Liguo Lin
  • Lan Yao

    (School of Economics; Key Laboratory of Mathematical Economics (MOE), Shanghai University of Finance and Economics, Shanghai 200433, China)

Abstract

The weak enforcement and monitoring systems employed in China (e.g., insufficient inspection resources and negligible fines for noncompliance) are widely blamed for the growing unrest over food safety in the country. Given this development, we consider a model where quality inspection performed by agencies is a means of disclosing information on product quality. We analyze the price-quality equilibrium scheme and show that a higher probability of inspection leads to lower price premiums attached to qualified products. We further investigate the welfare effect of minimum quality standards and inspection efforts and show that they should be complementary. We finally suggest that a state dependent inspection strategy, such as not inspecting those firms that have previously been found to be noncompliant, will enhance social welfare.

Suggested Citation

  • Liguo Lin & Lan Yao, 2014. "Inspections and Information Disclosure: Quality Regulations with Incomplete Enforcement," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 9(2), pages 240-260, June.
    • Handle: RePEc:fec:journl:v:9:y:2014:i:2:p:240-260
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    File URL: http://journal.hep.com.cn/fec/EN/10.3868/s060-003-014-0013-8
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    More about this item

    Keywords

    food safety; information disclosure; quality regulation; incomplete enforcement;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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