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About this sample
About this sample
Words: 1199 |
Pages: 3|
6 min read
Updated: 16 November, 2024
Words: 1199|Pages: 3|6 min read
Updated: 16 November, 2024
The term asymmetric information comes into existence when parties involved in an economic transaction are not equally informed. According to Laffont (2001), classic economics did not focus on asymmetric information for many years since the theory of value gained people's attention. However, it was still unclear how some entrepreneurs could maximize their profit by delegating obligations to other firm members.
Marschak and Radner (1972) developed a theory that identifies the asymmetric nature of information and concentrates on proper information management for better coordination. In older versions of economic models, it was assumed that all parties involved had perfect information, which is not the case in the majority of instances. This assumption was challenged in 1961 by Stigler in his well-cited paper "Economics of Information." Later, Akerlof, a pioneer in this subject, examined the outcomes of information asymmetry in the car market, famously known as the "market for lemons" (Akerlof, 1970).
When we compare classical and modern economic models, it is evident that in the newer version, interaction between players is inevitable. Therefore, there has been significant growth in the economic literature on contract design under asymmetric information over the last twenty years. In particular, according to Antle (2001), the food market, by its nature, is determined by imperfect information along its supply chain, which increases costs during economic transactions. Naturally, the food sector is subject to unknown characteristics. In many cases, indicators such as quality and safety are recognized only after consumption. Nelson has a classification for all goods, expressing that those attributes identified directly after purchasing are "experience goods," and "credence goods" are those whose attributes cannot be noticed even after purchasing (Nelson, 1970).
There are two main actors identified in economic transactions based on information allocation: agent and principal. The agent is the one who has the information, and the principal is the one who tries to understand the agent's actions and the good characteristics offered by the agent. Asymmetric information can lead to moral hazard after contracting when the agent’s actions cannot be observed by the principal, and also adverse selection before contracting when the specification of a good is uncovered by the principal. Usually, in the food sector, the agent tries to hide information, especially regarding food quality specifications. Therefore, the principal’s effort to disclose information may not be successful, leading to goods' depreciation in the market.
There has been a remarkable increase in attention towards asymmetric information in the last twenty years, especially in fields such as food quality, chain relationships, and agro-environment. In the modern economy, interactions between players have increased, which is increasingly related to the amount of information they exchange. Recognition of various social and economic conditions that influence actor collaboration along the supply chain is key to raising the competitiveness of European agriculture (Antle, 2001).
This paper aims to report the influence of asymmetric information issues on the Irish agri-food supply chain. The flow of literature focuses on problems regarding asymmetric information related to food attributes. There are two main food attributes: food quality and food safety, which are often not easy to measure. Therefore, information regarding product safety and quality is strongly asymmetrically placed throughout the supply chain.
An important point to consider is that quality and safety attributes along the supply chain are not usually easy to identify and notice. As mentioned earlier, in many cases, attributes are either "experience" or "credence." The two main food attributes, food quality and safety, have been highly discussed topics in the last 20 years, particularly food safety, as it relates to public health.
According to Grunert (2005), the concepts of safety and quality in the agri-food business are driven by market food chain players. Supermarkets, which reflect customer needs, are identified as the main actors in the food supply chain. On the other hand, perception of value is personal (Swartz, 2006), and points related to customer beliefs are separated from attributes and norms that food should meet. Stevenson and Pirog define the food supply chain as a network of food-related business enterprises, characterized by a high level of interactions where information exchange influences the supply chain's success (Stevenson & Pirog, 2008).
Trust is one of the most important factors that help the development of relationships (Johnston et al., 2004). In institutional economics, trust is considered an opportunistic behavior analyzed through game theory modeling. The social approach, developed by sociologists, focuses on the development of trust in relationships. The current study does not address trust development while it’s more related to a socio-anthropological approach; instead, the focus is on opportunistic behavior generated due to asymmetric information with an economic approach.
There are several solutions available in the literature to address asymmetric information in the food supply chain. One involves acquiring information, which implies a cost to improve the quality and accuracy of information. The second involves vertical coordination like vertical integration. The third option is the adoption of food standards, certificates, and insurance issued by third parties. Finally, regulation, which applies coordination between private and public agents, helps food operators adopt terms of food safety regulations.
As Stringer (2006) mentioned in his well-cited article, the food supply chain can be divided into the following steps: agricultural production, raw material processing, industrial information, distribution, and consumer. There are different solutions available for different parts of the supply chain. The supply chain is specified by having multiple-stage agency interaction. Moreover, farmers hand production to downstream processors, and processors hand raw material to farmers. The most suitable solution is based on the type of food attributes considered (quality or safety), asymmetric types (adverse selection or moral hazard), and the actors involved in the agri-food supply chain. It is probable that the first contract appeared in agriculture. There is extensive literature on contracts in the agriculture of developing countries and just a few on Eastern European countries. According to Bogetoft and Olesen (2004), contracts allow for achieving optimal production along the chain. The main merit of contracts is for farmers, as it shifts the risk of income instability and market security. The disadvantage is the decline in management flexibility. For processors, contracts help ensure a constant procurement of raw material and quality.
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