Welfare Effects of Mandatory Traceability When Firms are Heterogeneous
We develop a framework in which the cost of producing a quantity food and the cost of food safety differs across firms. We show that large firms may supply the safest food even though small firms have a cost advantage in producing safe food. The model shows that mandatory traceability can decrease the overall safety of food when small firms that supply the safest food exit the industry. Our model applies to food safety but can be applied to a wide range of issues related to regulation and product quality.