Paying for Unobservable Quality: Moral Hazard and the Challenges of Maintaining Quality along the Supply Chain

This paper investigates how the production of high-quality agricultural goods in developing countries depends on various characteristics of the supply chain. The model predicts that the price difference between high- and low-quality goods has a range of values for which high-quality goods are produced when a single agent carries out both tasks but not when the tasks are performed by separate agents. The range of price values for which this occurs decreases as quality becomes more observable or as the cost of maintaining quality along the supply chain decreases. Policy recommendations are also discussed.