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Description
Recent food safety concerns and well-publicized food scares have heightened interest in traceability in the U.S. food supply chain. When the first U.S. case of Bovine Spongiform Encephalopathy (BSE or "mad cow disease") was discovered in Washington state, federal authorities suggested that "it might take weeks, even months, to track the origins of the diseased cow" (Clemetson and Simon 2003, p. 1). With the cooperation of herd owners, livestock dealers, and market operators as well as detailed record searches between United States and Canadian agencies, the authorities were able to trace the origin of the infected cow to Canada after one week, but herd mates were never fully traced.
The December 2003 case of BSE in Washington state highlighted the demand for traceability to regain consumer confidence after the discovery of a food safety problem. Following the BSE event, marketing firms urged more traceability to the farms, but U.S. farm organizations resisted, which would be consistent with an effort to avoid potential liability. In addition, in the case of highly contagious disease or when multiple related dangers are suspected, traceability is important to reduce risk of further damage.
The interest in increased traceability is not unique to the red meat industry. The E. coli outbreak from tainted spinach in September 2006 illustrates the problems with traceability for fresh products. The contaminated spinach was rapidly traced to Natural Selection Foods as the packer but the farm of origin could not be identified without extensive further investigation. By matching the genetic fingerprints of the E. coli strain that sickened at least 200 people to the E. coli strain found in cattle feces, investigators were able to trace the contaminated spinach to one of four farms in San Benito or Monterey County in California (Food and Drug Administration 2006). The outbreak triggered many lawsuits (Marler Clark 2007) and proposals by the industry to legislate best management practices (Western Growers 2007). The production of spinach and the price paid to growers recovered to their 2005 levels within two months. However, the consumption of bagged spinach was still below the previous year level six months after the outbreak while the consumption of bunched spinach had rebounded (Calvin 2007).
Firms' motivations for traceability back to the farms of origin include: (a) protecting or regaining the general reputation of a product, a firm, an industry, or a country; (b) differentiating products by suppliers who provide traceability; (c) guaranteeing product origin when origin is an attribute of interest to consumers or others; (d) improving supply management by firms; (e) monitoring and assuring production or processing methods; (f) improving the effectiveness of product recalls after the discovery of a food safety or product quality problem. Traceability can also be motivated by protectionism, as it may increase the relative costs of imported goods when firms in the home country have lower costs for supplying traceability. The adoption of traceability can also be stimulated by governments to correct market failures (Golan et al. 2004). (1)
Another motivation for traceability, and the focus of this article, is the use of traceability to improve food safety. For instance, new traceability systems provide added information about suppliers that allows application of liability for food safety or other product quality problems. The resulting increase in liability creates incentives for firms to supply safer food.
Food traceability has received growing recognition by policy makers and firms in the food industry. The European Union recently adopted regulation 178/2002 which specifies mandatory traceability requirements in the European food industry with the stated objective of improving the safety of food (European Union 2002). Profit-driven examples of traceability initiatives in the United States include those for California cantaloupes (California Department of Food and Agriculture 2003) and U.S. beef (U.S. Department of Agriculture 2006).
Food traceability has also received growing attention in the economic literature. For example, Souza-Monteiro and Caswell (2005) analyze the network externalities associated with traceability for multi-ingredient products. In their recent ERS report, Golan et al. (2004) discuss traceability as a solution to selected market failures. They describe the development of traceability systems in three food sectors: fresh produce, grains and oilseeds, and cattle and beef. Dickinson and Bailey (2002) and Hobbs et al. (2005) estimate the willingness to pay for traceability using laboratory auction markets. They both find that consumers are willing to pay a small premium for traceability but that consumers are willing to pay more for traceability attached to other valuable attributes such as enhanced food safety.
Hobbs (2004), Golan et al. (2003), and Meuwissen et al. (2003) link food traceability to product liability. For Hobbs (2004), one role of traceability systems is to provide ex post information that facilitates the allocation of liability and creates incentives for firms to improve their food safety practices. However, Hobbs (2004) provides no explicit model of this relationship. Golan et al. (2003) also recognize that traceability can help to establish the extent of liability of a firm and potentially shift liability to others. Finally, Meuwissen et al. (2003) list issues related to insurance for product recalls and liability as one item on the economic agenda on traceability.
In this article, we focus specifically on the implications of additional traceability in the context of liability for food safety problems. We do not assess the costs of traceability or compare traceability to other means of improving food safety. Thus, we have no indication about whether traceability is an efficient tool to improve food safety practices. We also do not model the decision of firms to implement traceability. The choice to adopt traceability is complex and requires information regarding the cost of traceability, the possibility of vertical integration, and strategic behavior. Here, traceability is either set exogenously by private firms or mandated by government regulation. We model formally the linkage between traceability and food safety and establish the implications of an increase in traceability-liability for food safety. In this context, liability is defined as the responsibility to pay compensation for damages such as caused by foodborne illnesses. The capacity to trace the origin of food increases the possibility of legal remedy and compensation in the case of a food safety incident. We show explicitly the mechanism through which traceability systems create incentives for firms to supply safer food. Traceability also allows parties to more easily document that they are not responsible for harm.
A large body of literature compares the effectiveness of liability relative to regulation in maximizing social welfare (e.g., Shavell 1984; Kolstad, Ulen, and Johnson 1990; Roe 2004; and Boyer and Porrini 2004). Unlike Roe (2004) who compares the use of regulation and alternative liability rules to prevent foodborne illness, we focus specifically on how private or market traceability enhancements affect food safety by making liability feasible. We show how traceability can increase the supply of safe food by allocating liability in a two-stage marketing channel with homogeneous farms that sell raw material to homogeneous marketers who sell food to consumers. Firms are anonymous when traceability is not available hence the supply of safe food is characterized by a free-rider problem. We show how liability incentives are dampened for upstream firms such as farms because information may be imperfectly transmitted through the marketing chain.
Cost of Foodborne Illness and Liability
Foodborne illnesses have important economic impacts. Foegeding and Roberts (1994) estimate that each year in the United States, a total of 6.5 million to 33 million foodborne illnesses result in more than 9,000 deaths. The Economic Research Service estimates that the annual medical cost, productivity losses, and costs of premature deaths in the United States due to seven major foodborne pathogens range from $6.6 billion to $37.1 billion in 1996 dollars (Buzby and Roberts 1997). The implication is that there is considerable scope for liability if even a small share of those costs of foodborne illnesses could be traced back to their origin and those responsible could be held liable.
A very small proportion of consumers seeks monetary compensation for damages related to foodborne illnesses. Buzby and Frenzen (1999) calculate, conservatively, that foodborne poisoning results in only 0.9 to 4.5 legal actions per million foodborne illnesses. The Buzby... |
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