# Presentation: 353724

## 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

## 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**

## 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?

## 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

## 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)

## 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)

## 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

## 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

## 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)

## Private Firm/Public Agent Model

- Private firm’s goal is to minimize expected total cost (including damages, liability, and risk, unknown and random variables)
- Public agent’s 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

## Conditions for Optimal Use

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

## 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

## 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

## 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

## 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