2003 Volume 12 Issue 2 Pages 25-32
Information asymmetry of food safety causes moral hazard and adverse selection. a solution of this market failure is to monitor hidden activity and information. There are two types of institutional responses to designing food systems which address both these functions. One is internalizing these functions between the buyer and seller. The other is externalizing these functions under a third party play monitor. In the Australian meat industry, third parties monitor firm's activity at all stages from farm to retailer; likewise, in the Danish meat industry. The merits of third party monitoring are enhancement of the uniformity of food safety standards and reduction of the monitoring cost resulting from economy of scale. There is signaling of food safety information, such as third party grading systems in both countries. However, these grading systems are not well know, meaning that these systems do not work very well as a signal. Increasing both monitoring accuracy with technological improvement and signaling accuracy through information transmission is necessary for the development of food systems ensuring food safety.
