Food Safety Audits in Developing Economies: Decentralization vs. Centralization

Abstract

Problem Definition: This paper investigates and compares two types of food safety auditing structures: decentralized audits and centralized audits. Academic/Practice Relevance: Decentralized food safety auditing systems are common among developing economies, i.e., different tiers of a food supply chain are audited by different government agencies. Such an auditing structure is widely criticized as ineffective in mitigating food safety risks. Some developing countries started implementing centralized auditing systems as a remedy for the mis-coordination among local auditing agencies. We compare food safety outcome and economical payoff of the two auditing systems. Methodology: We study a parsimonious game-theoretic model of a one-supplier-one-buyer supply chain and two agencies auditing each tier of the supply chain, respectively. Under decentralized audits, each of the two agencies minimizes its individual cost and decisions are sequential; under centralized audits, they minimize the total agency cost and commit upfront. Results: We identify driving forces behind equilibrium decisions. The penalty-shield effect of an agency's auditing capability may lead to risky behavior by the supplier. A free-riding effect between the two agencies may lead to less auditing. Centralized commitment makes the agencies the leader in the game at the expense of them losing the flexibility to respond to actions of supply chain members. The common objective under centralization increases the incentives for at least one agency to audit, but may assign the lower-cost-less-capable agency to audit. Hence, centralized audits can lead to inferior performance on both food safety outcome and system payoff. Managerial Implications: Changing the auditing structure from decentralization to centralization may fail to improve food safety and system payoff since it may replace one form of inefficiency with another. Addressing the new inefficiencies should be part of the ongoing effort to enhance centralized audits.