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Food safety, reputation and trade

Listed author(s):
  • Mélise Jaud

    (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, World Bank - Banque Mondiale - France)

I develop a simple dynamic model of reputation-based transactions between a buyer in one country and a supplier in another. I use the model to study the impact of a more stringent regulation on the buyer optimal purchase volume within an existing buyer-seller partnership. A more stringent standard affects the volume of trade in two intuitive ways: directly, a stricter standard affects the supply of quality goods and indirectly through reputation. I refer to the former effect as the regulation effect, and to the latter as the reputation effect. I show that, whereas most of the empirical literature has so far assumed that more stringent standards would be likely to reduce trade, the net effect is in fact non-monotone, even without taking into account endogenous technological upgrading in the supplier country. It varies with the belief the buyer holds about his seller at the time the change in regulation takes place. For both very low and very high seller's reputation, the reputation effect is negligible vis-à-vis the regulation effect. For intermediate levels of the supplier's reputation, reputation has the power to significantly mitigate the direct negative effect of a more stringent sanitary standard on trade. This result has significant implications for developing countries, for which access to developed countries markets is by and large, said to be disproportionately constrained by stricter standards.

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Paper provided by HAL in its series Working Papers with number halshs-00586310.

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Date of creation: Apr 2011
Handle: RePEc:hal:wpaper:halshs-00586310
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  1. Luis Araujo & Emanuel Ornelas, 2005. "Trust-Based Trade," IBMEC RJ Economics Discussion Papers 2005-08, Economics Research Group, IBMEC Business School - Rio de Janeiro.
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