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Abstract

This paper analyses an incentive payment-based approach to improving food safety in the supply chain. It develops a principal-agent model of the food supply chain in which the principal offers heterogeneous agents a payment to implement costly additional practices to improve food safety. It is shown that the presence or absence of the moral hazard problem affects the balance of benefits and costs from broadening the scope of the system from just lower cost larger agents to include higher cost smaller agents, thereby affecting the optimal design of the system. In particular, broadening the scope of the system to include smaller agents by increasing the size of the incentive payment can ameliorate the moral hazard problem among larger agents to the extent that this more costly approach is socially optimal.

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