In recent years, some domestic food enterprises commit to take vertical integration and show their high investment in quality control, whereas the actual quality of their product is not satisfactory. In order to provide an economic explanation for this phenomenon, we develop an asymmetric information game with ex ante investment in quality control and ex post liability. In this model, the enterprise first makes investment on its potential of quality control. The investment is observable and determines the enterprise’s upper bound of quality control. The actual effort in quality control which the enterprise makes, however, is its private information. The product is either safe or unsafe once the enterprise chooses its actual quality control, and the possibility of safe product is higher with more efforts on quality control. When the unsafe product is sold, it will perhaps cause health accidents. The enterprise may be punished for its negligence after the accidents. We find that, due to its private information in quality control, the enterprise is likely to leave part of its investment unused when the investment is high and its actual efforts on quality control is lower than the potential implied by its investment. Therefore, the enterprise may make itself " unworthy of the name” in quality control, which leads to " strategic overcapacity” in quality investment. Furthermore, the enterprise will be encouraged to become " worthy of the name” in quality control by enhancing the supervision and increasing the penalty for its negligence in quality control. Compared with the existing literature, this paper has two marginal theoretical contributions. First, it deepens our understanding of the relationship between vertical integration and product quality. On the one hand, this paper obtains a positive relationship between these two variables which is similar to most of the literature in this field. On the other hand, however, we show that this positive relationship would be diminishing with higher degree of integration if the enterprise can choose its actual efforts after investing its potential on quality control through vertical integration. Second, this paper is related to the literature on quality signaling by advertising since the investment in our model can be regarded as a signal of the enterprise’s actual quality and its product quality. Different from this branch of literature, the investment is neither purely informative advertising nor dissipative advertising since it implies the potential of the enterprise’s quality control. This paper shows that in equilibrium this " partly” informative investment may become a positive yet imperfect signal of product quality. This paper induces some policy implications. First, it indicates that when the supervision and punishment for negligence are strengthened, the enterprise will become " worthy of the name”, i.e. the enterprise will make full use of its potential and provide high level of quality control. Second, the enterprise may strategically waste some of its capital and cause inefficiency in quality control if it merely gets financial support from the government without matched supervision. Third, besides its implications on the food safety issues, our findings can also provide some insights and policy suggestions for other fields, such as the domestic policy system in research funding and the targeted poverty reduction.
/ Journals / Journal of Finance and Economics
Journal of Finance and Economics
LiuYuanchun, Editor-in-Chief
ZhengChunrong, Vice Executive Editor-in-Chief
YaoLan BaoXiaohua HuangJun, Vice Editor-in-Chief
An Economic Explanation for “Unworthy of the Name” and “Worthy of the Name”: Taking the Food Safety Problem as an Example
Journal of Finance and Economics Vol. 44, Issue 09, pp. 109 - 122 (2018) DOI:10.16538/j.cnki.jfe.2018.09.007
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Cite this article
Li Xiang, Huang Annan, Li Xinwei. An Economic Explanation for “Unworthy of the Name” and “Worthy of the Name”: Taking the Food Safety Problem as an Example[J]. Journal of Finance and Economics, 2018, 44(9): 109-122.
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