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Abstract

In response to the recent outbreaks of food-borne illness, the 'Good Agricultural Practices' program has been widely adopted to ensure consistency of food safety. This paper presents a theoretical framework to analyze the performance of the program with respect to output quality based on the assumption of predetermined productive capacity (farm size), heterogeneous farms and exogenous detection. Our main results are: (i) farms respond to the monitoring and enforcement not only by reducing fraudulent output, but also by increasing truly high-safety output until the perfect compliance level is achieved. (ii) the monitoring agency takes farm strategies as given and its optimal inspection policies are: If the monitoring budget is not enough to cover the necessary inspection cost of achieving perfect high-safety output level, it will allocate resources to farms with larger size and lower costs; If the budget is enough to obtain perfect level of high-safety output but is not enough to eliminate fraudulent output completely, the monitoring agency will expend equal effort on all the farms.

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