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Optimal Quality Assurance Systems for Agricultural Outputs

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Author Info
Miguel Carriquiry () (Center for Agricultural and Rural Development (CARD), Food and Agricultural Policy Research Institute (FAPRI))
Bruce A. Babcock () (Center for Agricultural and Rural Development (CARD), Midwest Agribusiness Trade Research and Information Center (MATRIC))
Roxana Carbone

Additional information is available for the following registered author(s):

Abstract

New quality assurance systems (QASs) are being put in place to facilitate the flow of information about agricultural and food products. But what constitutes a proper mix of public and private efforts in setting up QASs is an unsettled question. A better understanding of private sector incentives for setting up such systems will help clarify what role the public sector might have in establishing standards. We contribute to this understanding by modeling the optimal degree of "stringency" or assurance in a processor's quality control system over procurement of agricultural output when there exists uncertainty about quality. Our model addresses two questions: (1) Should a buyer of agricultural outputs implement a QAS as a way to gain and provide information about product quality to its potential customers? and (2) Given that it is profitable to adopt a QAS, what is the profit-maximizing degree of assurance in the system? We study a particular case in which the input buyer requires its suppliers to implement a given QAS. Increased stringency through the QAS reduces the probability of type I errors of falsely declaring that a product is of high quality and of type II errors of rejecting high-quality output. The optimal degree of assurance balances the marginal cost of increased assurance with the value of reduced type I and type II errors. The model predicts that the optimal degree of assurance depends on (1) the likelihood that the sought-after attribute is discoverable by consumers, (2) the price premium paid for the attribute, (3) the cost of quality control, and (4) the damage caused by false certification. A number of privately developed U.S. QASs are examined to see how well the model predictions are supported.

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Publisher Info
Paper provided by Center for Agricultural and Rural Development (CARD) at Iowa State University in its series Center for Agricultural and Rural Development (CARD) Publications with number 03-wp328.

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Date of creation: Mar 2003
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Handle: RePEc:ias:cpaper:03-wp328

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Related research
Keywords: food products; price premium; product differentiation; quality assurance.;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Caswell, Julie A. & Mojduszka, Eliza M., 1996. "Using Informational Labeling To Influence The Market For Quality In Food Products," Working Papers 25989, Regional Research Project NE-165 Private Strategies, Public Policies, and Food System Performance. [Downloadable!]
  2. Hennessy, David A., 2002. "Information Asymmetry as a Reason for Food Industry Vertical Integration," Staff General Research Papers 5032, Iowa State University, Department of Economics.
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    Other versions:
    • Elmore, Steven L. & Smith, Darnell B. & Meyers, William H. & Hart, Chad & Babcock, Bruce A. & Lawrence, John D., 1996. "Iowa Ag Review," Staff General Research Papers 1027, Iowa State University, Department of Economics.
    • Babcock, Bruce A. & Beghin, John C. & Clarke, Sandra & Heffernan, Keith & Hempe, Betty & Kaus, Phillip & Olson, Becky, 2001. "Iowa Ag Review," Staff General Research Papers 1940, Iowa State University, Department of Economics.
    • Babcock, Bruce A. & Beghin, John & Thomas, Katie & Heffernan, Keith & Olson, Becky & Kaus, Phillip, 2000. "Iowa Ag Review," Staff General Research Papers 1819, Iowa State University, Department of Economics.
    • Mohanty, Samarendu & Hayes, Dermot J. & Clemens, Roxanne & Meyers, William H. & Smith, Darnell B. & Elmore, Steven L. & Rude, James & Baumel, C. Phillip & Fabiosa, Jacinto & Fuller, Frank H., 1997. "Iowa Ag Review," Staff General Research Papers 1069, Iowa State University, Department of Economics.
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    • Babcock, Bruce A. & Beghin, John & Thomas, Katie & Heffernan, Keith & Olson, Becky & Kaus, Phillip, 1999. "Iowa Ag Review," Staff General Research Papers 1560, Iowa State University, Department of Economics.
    • Babcock, Bruce A. & Beghin, John & Clarke, Sandra & Heffernan, Keith & Hempe, Betty & Hart, Chad & Olson, Becky, 2001. "Iowa Ag Review," Staff General Research Papers 1997, Iowa State University, Department of Economics.
    • Lawrence, John D. & Meyer, Seth D. & Kruse, John R. & Hayes, Dermot J. & Babcock, Bruce A. & Hennessy, David & Smith, Darnell B. & Meyers, William H., 1995. "Iowa Ag Review," Staff General Research Papers 864, Iowa State University, Department of Economics.
    • Babcock, Bruce A. & Beghin, John & Clarke, Sandra & Heffernan, Keith & Hempe, Betty & Olson, Becky, 2002. "Iowa Ag Review," Staff General Research Papers 2052, Iowa State University, Department of Economics.
    • Babcock, Bruce A. & Beghin, John & Clarke, Sandra & Heffernan, Keith & Hempe, Betty & Clemens, Roxanne & Olson, Becky, 2002. "Iowa Ag Review," Staff General Research Papers 2092, Iowa State University, Department of Economics.
    • Babcock, Bruce A. & Chaherli, Nabil M. & Lakshminarayan, P. G. & Smith, Darnell B. & Elmore, Steven L. & Pautsch, Greg & Meyers, William H. & Hart, Chad, 1999. "Iowa Ag Review," Staff General Research Papers 1527, Iowa State University, Department of Economics.
    • Babcock, Bruce A. & Beghin, John & Thomas, Katie & Heffernan, Keith & Olson, Becky & Kaus, Phillip, 2000. "Iowa Ag Review," Staff General Research Papers 1778, Iowa State University, Department of Economics.
    • Babcock, Bruce A. & Beghin, John & Thomas, Katie & Heffernan, Keith & Olson, Becky & Kaus, Phillip, 1999. "Iowa Ag Review," Staff General Research Papers 1667, Iowa State University, Department of Economics.
    • Babcock, Bruce A. & Beghin, John & Heffernan, Keith & Kaus, Phillip & Pim, Judith & Hempe, Betty & Pyle, Janis & Olson, Becky, 2000. "Iowa Ag Review," Staff General Research Papers 1859, Iowa State University, Department of Economics.
    • Babcock, Bruce A. & Beghin, John & Heffernan, Keith & Kaus, Phillip & Thomas, Katie & Olson, Becky, 2000. "Iowa Ag Review," Staff General Research Papers 1713, Iowa State University, Department of Economics.
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    • Babcock, Bruce A. & Clarke, Sandra & Hempe, Betty & Olson, Becky & Beghin, John & Heffernan, Keith & Hart, Chad, 2001. "Iowa Ag Review," Staff General Research Papers 1983, Iowa State University, Department of Economics.
    • Smith, Darnell B. & Meyers, William H. & Meyer, Seth D. & Hayes, Dermot J., 1999. "Iowa Ag Review," Staff General Research Papers 1528, Iowa State University, Department of Economics.
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    Other versions:
  8. Timothy J. Feddersen & Thomas W. Gilligan, 2001. "Saints and Markets: Activists and the Supply of Credence Goods," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 10(1), pages 149-171, 03. [Downloadable!] (restricted)
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  10. Hayes, Dermot J. & Lence, Sergio H., 2007. "Farmer-Owned Brands?," Staff General Research Papers 12707, Iowa State University, Department of Economics.
    Other versions:
  11. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August. [Downloadable!] (restricted)
  12. Fearne, Andrew & Hornibrook, Susan & Dedman, Sandra, 2001. "The Management Of Perceived Risk In The Food Supply Chain: A Comparative Study Of Retailer-Led Beef Quality Assurance Schemes In Germany And Italy," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association (IAMA), vol. 4(01). [Downloadable!]
  13. Laurian J. Unnevehr & Helen H. Jensen, 1996. "HACCP as a Regulatory Innovation to Improve Food Safety in the Meat Industry," Center for Agricultural and Rural Development (CARD) Publications 96-wp152, Center for Agricultural and Rural Development (CARD) at Iowa State University. [Downloadable!]
    Other versions:
  14. Darby, Michael R & Karni, Edi, 1973. "Free Competition and the Optimal Amount of Fraud," Journal of Law & Economics, University of Chicago Press, vol. 16(1), pages 67-88, April.
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Miguel Carriquiry, 2004. "Guaranteed Tender Beef: Opportunities and Challenges for a Differentiated Agricultural Product," Center for Agricultural and Rural Development (CARD) Publications 04-wp371, Center for Agricultural and Rural Development (CARD) at Iowa State University. [Downloadable!]
  2. Carriquiry, Miguel A. & Babcock, Bruce A., 2004. "Reputation, Quality Observability, and the Choice of Quality Assurance Systems," Staff General Research Papers 12038, Iowa State University, Department of Economics. [Downloadable!]
    Other versions:
  3. Innes, Brian & Kerr, William & Hobbs, Jill, 2007. "International Product Differentiation through a Country Brand: An Economic Analysis of National Branding as a Marketing Strategy for Agricultural Products," Commissioned Papers 6131, Canadian Agricultural Trade Policy Research Network. [Downloadable!]
  4. Carriquiry, Miguel A., 2004. "Guaranteed Tender Beef: Opportunities and Challenges for a Differentiated Agricultural Product," Staff General Research Papers 12035, Iowa State University, Department of Economics. [Downloadable!]
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