Information asymmetry, third party certification and the integration of organic food value chain in China

Purpose: The purpose of this paper is to discuss characteristics of organic food value chain governance and policy tools that can increase the supply of good quality of agri-products. Design/methodology/approach: This paper discusses a national organic food supply system in China, identifying the link between an organization form with a social confidence crisis and information asymmetry as the main challenges. It develops an analytical model of the market structure of organic certification based on the contract theory, which considers the certification incentive driven by both farmers and processors. Two cases of raw milk producers and processors provide empirical data. Findings: The argument which is brought forward is that product information asymmetry together with strict requirement for ensuring organic food integrity brings the organic milk value chain into a highly integrated organization pattern. A tight value chain is effective in the governance of organic food supply chain under third party certification (TPC), while a loose value chain discourages producing organic products because of transaction costs. TPC is found to be a positively correlation with a tight value chain, but it brings high organizational cost and it raises cost for consumers. Originality/value: This is the first paper discussing the governance of organic food value chain in Chinese milk industry.