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Asymmetric information along the food supply chain

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The term asymmetric information comes to existence when parties involved in an economic transaction are not equally informed. According to Laffont, classic economic did not focus on asymmetric information for many years since theory of value gained peoples concentration. However it was still unclear how some entrepreneur can maximize their profit of employees delegating obligations to other firm members.

Marschank and Radner developed a theory that identifies asymmetric nature of information and concentrates on proper information management for a better coordination.

In an old version of economic model, it has been assumed that all parties involved are having a perfect information which is not the case in majority of cases. This approach that parties are having perfect information has been changes on 1961 by Stigler on his well cited paper called Economic of Information. Later, Akerlof who is one the pioneer in this subject, examined all the outcomes of information asymmetry in car market.

When we compare the classical and the modern economic model, it is obvious that in the new version interaction between players is inevitable. Therefore, there has been a significant growth on economic literature of contract design under asymmetric information in last twenty years.

In particular, according to Antle, food market by its nature is determined by imperfect information along with its supply chain that increases the costs during economic transaction. Naturally, 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, he express that those attributes that are identify directly after purchasing as experience good and credence goods are those that their attributes cannot be noticed after purchasing.

There are two main actors identifies in economic transaction based on information allocation: agent and principle. Agent is the one who has the information and principle is the one who tries to understand agent actions and good characteristics offered by the agent. Asymmetric information can be a moral hazard after contracting when agent’s action cannot be observed by principle, also adverse selection before contracting when specification of good is uncovered by principle. Usually in food sector, agent tries to hide information especially when it comes to the food quality specifications. Therefore the principle’s effort to disclose information will not be successful that leads to goods depreciation in the market.

There has been remarkable increase toward asymmetric information in last twenty years especially in fields such as food quality and chain relationship, agro environment. In the modern economy interaction between players are increased which is more and more related to the amount of information that they exchange. Antle (2001) mentioned that food market by its nature determined by imperfect information with asymmetric assigned along the supply chain that are in charge with the increasing the cost during economic transaction. Recognition of various social and economic conditions that influence actor’s collaboration along with the supply chain is key to raise competitiveness of European agriculture.

This paper aims to report influence of asymmetric information issues on Irish agri-food supply chain.

The flow of literature focus on problems regarding asymmetric information related to food attributes. There are two main food attributes food quality and food safety, which are in many cases not easy to measure. Therefore, information regarding product safety and quality are 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 be identified and noticed along the agri-food supply chain. As it was mentioned in introduction chapter, in many cases attributes are experience (food attributes that can be identified after purchasing) or credence (those food attributes that cannot be determined after purchasing).

The two main food attributes, food quality and safety have been highly discussed topic in last 20 years. In particular, food safety while it relates to the public health. Food quality divided in two parts. It can be those specifications that good should meet such as any technical specifications or as a value such as the level of suitability to the specific use. However nowadays, quality is more related to the customer orientation rather than efficiency and quality control. Increasing product’s quality level or adding value to the product all depends on customer expectations. According to Grunert, the two concept of safety and quality in agri-food business are driven by players of the market food chain (Grunert, 2005). Therefore, supermarkets who are reflecting customer needs are identified as the main actors in food supply chain. On the other hand, perception of value is personal (Swatz, 2006) therefore points that are related to the customer beliefs are separated from attributes and norms that food should meet.

Stevenson and Pirog defined food supply chain as a network of food- related business enterprise. Therefore, food supply chain is characterized by high level of interactions that exchange of information influence the success of supply chain. One of the most important factors that helps development of relationship is trust (Johnston, et al. 2004). There are two main approaches adopted on the concept of trust in scientific literature, the economic and the social. In institutional economics, trust granted as opportunistic behavior that analyze interaction among agents with use of game theory modeling. The social which is developed by sociologist focuses on development of trust in relationships. The current study does not address development of trust while it’s more related to socio-anthropological approach, instead the focus is more on opportunistic behavior generated because of asymmetric information with economic approach.

There are some solutions available in literature to accurate asymmetric information in the food supply chain. One contains acquiring information which implies cost to improve the quality and accuracy of information. The second consists in the vertical coordination like vertical integration. The third option is adoption of food standards, certificate and insurance issued by the third parties. And finally the last option is going to be the regulation, some rules that applies coordination between private and public agents to help food operators to adopt terms of food safety regulations.

As Stringer was mentioned in his well cited article, the food supply chain can be divided to following steps:

  1. Agricultural production
  2. Raw material processing
  3. Industrial information
  4. Distribution
  5. Consumer

There are different solutions available for different parts of supply chain. 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 type of food attributes taking to account (quality or safety) and asymmetric types (adverse selection or moral hazard) and also based on actors involved in agri-food supply chain.

It is probable that the firs contract appeared in agriculture. There is an extensive literature on contracts in agriculture of developing countries and just few on Eastern European countries. According to Bogetoft and Olesen contracts allows to achieve an optimal production along the chain.

The main merit of contact is for farmers, while it shifts the risk of income instability and market security. And disadvantage is going to be declining the management flexibility. For processors, contracts help to have constant procurement of raw material and quality.

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