Inspection, testing errors and trade in tainted products

•We study a trade game between a foreign firm and a home government.•We derive conditions under which a foreign firm chooses to export tainted products.•Conditions are obtained under which goods are imported though harmful to health.•We identify self-correcting mechanisms and aggravating activities....

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Bibliographic Details
Published in:Journal of the Japanese and international economies 2015-03, Vol.35, p.99-116
Main Authors: Viaene, Jean-Marie, Zhao, Laixun
Format: Article
Language:English
Subjects:
Asymmetric information
Error
Errors of testing
Experience good
Exports
Food contamination & poisoning
Foreign enterprises
Free trade
Game theory
Globalization
International trade
Japan
Nationalism
Product quality
Product tampering
Sabotage
Self correction
Studies
Tainting
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Summary:•We study a trade game between a foreign firm and a home government.•We derive conditions under which a foreign firm chooses to export tainted products.•Conditions are obtained under which goods are imported though harmful to health.•We identify self-correcting mechanisms and aggravating activities.•Parameter regions of each Nash equilibrium are numerically simulated. This paper examines international trade and inspection involving tainted products in a model of quality choice, facing fears that globalization is the cause of numerous food incidents. Particularly, we ask the following questions: (i) What are the conditions under which foreign firms choose to produce tainted goods? (ii) Does globalization via freer trade lower product safety? (iii) Why are goods imported even though they are known to be harmful? We show the existence of a free trade Nash equilibrium characterized by production and trade of high-quality non-tainted products. However, free trade cannot prevent the export of tainted goods, because the foreign firm may deviate under different combinations of parameters. We identify self-correcting mechanisms such as nationalism and a political-economy re-allocation of public resources in favor of customs authorities. Nevertheless, we also uncover activities that exacerbate tainted production like errors of testing and sabotage by rival firms.
ISSN:0889-1583
1095-8681
DOI:10.1016/j.jjie.2014.11.001