A model-based approach to moral hazard in food chains - What contribution do principal-agent-models make to the understanding of food risks induced by opportunistic behaviour?

Food risks may be caused by moral hazard, i.e. by opportunisticbehaviour of upstream sellers who exploit the fact that many foodproduct qualities remain uncertain to downstream buyers in thecourse of conventional market transactions (credence qualities).Due to this lack of market transparency buyers run the risk to paypremium prices for inferior products (quality risks); furthermore,they run the risk to use or consume substances which are harmful(health risks). Therefore, they will want to design optimal contractsand controls preventing opportunistic behaviour. Usually, however,buyers cannot contract contingent on the actions of upstreamsellers because they cannot observe them directly (informationasymmetry).Motivated by the obviously game-theoretic nature of the problem,we investigate the potential of principal-agent-models for the analysisof food risks induced by opportunistic behaviour. We identify abinary stochastic moral hazard model which is able to represent themicroeconomic situation of buyers (principals) and sellers (agents)adequately. On the one hand, the model considers the remunerationcosts which are needed to induce compliance. On the other hand, itaccounts for direct costs and benefits of control as well as a limitedtraceability caused by the multiple agents setting of most food riskproblems. If we know the costs of compliance, the stochastic relationshipbetween the agent’s action and the product quality, and thetraceability coefficient, we are able to determine the optimal controlintensity and price for any cost of control function and predefinedupper limit of the imposable sanction.For practical applications the main problem will be how to procureempirical data. The manageable data requirements of the binarymodel qualify it as a ready to use model for future applications: first,it can be used in positive analyses of food chains in order to detectthe hot spots where food risks induced by opportunistic behaviourare to be expected for economic reasons. Secondly, it can be usedin normative analyses in order to identify contractual designs whichinduce compliance at minimum costs. Thirdly, it can be used inorder to compare the efficiency of different system structures takinginto account the costs of change.