The Optimal Use of Food Safety Control Mechanisms with endogenous risk

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The Optimal Use of Food Safety Control Mechanisms
(with endogenous risk)
Eliza M. Mojduszka USDA/OCE/ORACBA 2007 SRA
Annual Meeting San Antonio, Texas December
10th-13th, 2007
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Presentation Outline

• Identifying the Policy Problem
• Existing Studies
• Research Objectives Approach
• Private Firm/Public Agent Model
• Conditions for Optimal Use of Mechanisms
• Issues of Estimation
• Conclusions
• Implications of the Research

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Why Study the Use of Food Safety Control
Mechanisms?

• In recent years, government regulation of food
  safety increased substantially (e.g., HACCP
  direct regulation)
• Private mechanisms (e.g., self-regulation, third
  party certification) also play an important role
  in the supply of safer food
• However, the number of food safety outbreaks is
  on the rise
• Could the mechanisms be more effective?

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Existing Studies

• The current literature on the use of food safety
  control mechanisms is primarily based on analysis
  of
• - single control mechanisms
• and/or
• - biological risk processes are not explicitly
  considered

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Examples of Studies of Single Control Mechanisms

• Single food safety control mechanisms are
  investigated and evaluated, there is no
  interaction between the mechanisms (e.g., Roberts
  et al. 1996, on HACCP Buzby and Frenzen 1999, on
  product liability Holleran et al. 1999, on
  private incentives Skees et al. 2001, on food
  safety recall insurance)

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Examples of Studies of Multiple Control
Mechanisms

• Multiple safety control mechanisms are
  investigated and evaluated, there is interaction
  between the mechanisms however, biological risk
  processes are not considered (e.g., Kunreuther,
  H. 2002 Zeckhauser, R. 1996 Kolstad et al.
  1990 Shavell, S. 1984)

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Research Objectives

• Propose new theoretical/modeling techniques that
  build a comprehensive understanding of the
  interdependence between various food safety
  control mechanisms and endogenous biological risk
  processes
• Investigate how economic behavior and incentives
  influence risk levels

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Research Objectives (cont.)

• Explain the apparent paradox that while food
  safety control mechanisms increased, the number
  of food safety incidence, including large-scale
  outbreaks of food contamination, in the food
  sectors is on the rise

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Research Approach

• Integrate a private firm/public agent economic
  model and a biological risk model
• - Specify firm/public agent economic objectives
  as also functions of biological risk
  processes
• - Model explicitly biological risk processes
  (as endogenously given)
• The economic theory of endogenous risk provides
  the best framework for the analysis (Ehrlich and
  Becker 1972, Shogren and Crocker 1991)

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Private Firm/Public Agent Model

• Private firms goal is to minimize expected total
  cost (including damages, liability, and risk,
  unknown and random variables)
• Public agents goal is to minimize expected
  social cost
• The first order conditions provide the optimal
  level of use of private and public food safety
  control mechanisms in any time period and sate of
  nature

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Conditions for Optimal Use

• Marginal damage and liability cost reduction
  (firms EMB) must equal the MC of private
  investment in the ex-ante food safety control
  mechanism
• Marginal reduction in the consequences of damages
  (additional firms EMB) must equal MC of private
  investment in the ex-post mechanism

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Conditions for Optimal Use (cont.)

• Marginal damage reduction (EMSB) must equal the
  MC of public investment in the ex-ante food
  safety control mechanism
• Marginal reduction in the consequences of public
  damages related to food contamination must equal
  MC of public investment in the ex-post mechanism

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Issues of Estimation

• Identification is an issue in integrated models
  and it needs to be analyzed on a case-by-case
  basis (Elrod 1988, Keane 1997)
• There are three basic approaches of estimating
  the models
• - sequential numerical
• - simultaneous numerical
• - simulation
• As the number of variables increases, numerical
  integration methods become infeasible and
  simulation methods must be used

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Conclusions

• Economic and biological systems jointly determine
  the level of risk and the optimal mix of food
  safety control mechanisms
• We provide new methods that allow for integrated
  analyses of the economic system and the
  biological system

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Implications of the Research

• Our approach allows us to obtain more precise and
  unbiased estimates of risk and economic behavior
  parameters related to risk
• This information is crucial to the design of
  effective food safety programs
• More work is needed to evaluate the effects of
  various linkages between the economic and
  biological systems