Traceability, Lot Size, Recall Penalty and Food Safety

Regulators increasingly advocate traceability along food supply chains to better trace the source of unsafe products. Yet it is still unclear how traceability affects food safety. We investigate the impact of traceability and lot size on food safety and social welfare. We use a game-theoretical model to study a double moral hazard problem between a raw material supplier and a manufacturer in a food supply chain. Our findings are as follows. First, traceability cannot guarantee safer food products, as both supplier and manufacturer can lower their safety related efforts under higher traceability. Moreover, lower food safety resulted from traceability can occur not only when traceability accuracy is moderate but also when it is high (even perfect). Traceability is more likely to lower food safety when the supplier can little improve raw material safety (instead of the opposite), which challenges our common belief of installing traceability system in vulnerable food supply chains more likely to help improve food safety. Second, higher traceability can lead to lower social welfare even if a policy maker can optimally adjust the recall penalty via ways such as tort reform. Moreover, to improve social welfare, higher traceability may need to couple with a higher recall penalty, instead of the other way around as one may intuitively think. Third, smaller lot size, although implies fewer number of food products are affected should a lot is recalled, can also lead to lower food safety, especially when traceability accuracy is low. Indeed, the initiate of lot size reduction should be conducted with caution without a traceability system with adequate accuracy in place. The implications of our findings to regulators and practitioners regarding food safety and social welfare are discussed