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Testing errors, supplier segregation, and food safety

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  • S. Andrew Starbird

Abstract

Diagnostic tests provide valuable information to buyers about credence attributes such as food safety and GMO content. Errors in testing, however, can mislead buyers and lead to problems such as adverse selection. The ability to segregate suppliers who can deliver safe food from suppliers who cannot depends on the accuracy of the test procedure. In this article we examine the effect of test sensitivity, specificity, and sampling error on the ability to segregate safe and unsafe suppliers. We find that there is a maximum level of error below which unsafe suppliers are deterred from accepting a utility maximizing buyer's bid price. The maximum error depends on the probability that a supplier's production is unsafe and the cost of producing an unsafe lot, among other things. Understanding this relationship makes it possible to design contracts and government regulations that discourage unsafe suppliers from trading.

Suggested Citation

  • S. Andrew Starbird, 2007. "Testing errors, supplier segregation, and food safety," Agricultural Economics, International Association of Agricultural Economists, vol. 36(3), pages 325-334, May.
    • Handle: RePEc:bla:agecon:v:36:y:2007:i:3:p:325-334
    DOI: 10.1111/j.1574-0862.2007.00210.x
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    References listed on IDEAS

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    1. Macho-Stadler, Ines & Perez-Castrillo, J. David, 2001. "An Introduction to the Economics of Information: Incentives and Contracts," OUP Catalogue, Oxford University Press, edition 2, number 9780199243273.
    2. Golan, Elise H. & Roberts, Tanya & Salay, Elisabete & Caswell, Julie A. & Ollinger, Michael & Moore, Danna L., 2004. "Food Safety Innovation In The United States: Evidence From The Meat Industry," Agricultural Economic Reports 34083, United States Department of Agriculture, Economic Research Service.
    3. Frenzen, Paul D. & Buzby, Jean C. & Rasco, Barbara, 2001. "Product Liability And Microbial Foodborne Illness," Agricultural Economic Reports 34059, United States Department of Agriculture, Economic Research Service.
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    2. John C. Beghin & Anne-Celia Disdier & Stéphan Marette, 2017. "The Economics and Potential Protectionism of Food Safety Standards and Inspections: An Application to the U.S. Shrimp Market," World Scientific Book Chapters, in: John Christopher Beghin (ed.), Nontariff Measures and International Trade, chapter 13, pages 209-237, World Scientific Publishing Co. Pte. Ltd..

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