Increased awareness and prevalence of food borne diseases in produce is challenging traditional notions of food quality. Consumers are finding that judging fresh produce according to visual characteristics does not preclude the presence of microbial pathogens. Food borne illnesses caused by produce is a growing problem. According to the Food and Drug Administration (FDA), the percentage of food borne illnesses attributed to produce rose from 2 percent in the 1973-87 period to 8 percent in the 1988-91 period. This is likely due to increased consumption of fresh, and therefore, uncooked produce.

In response to the growth of food borne illness outbreaks, both the U.S. government and domestic producer associations are developing voluntary guidelines for the production and handling of fresh fruits and vegetables. A shortcoming of voluntary guidelines is that some firms may avoid improving food safety precautions because of the anonymity of the marketplace, that is, tracing back to find the source of a microbial pathogen may be very difficult. Also, fresh fruits and vegetables generally do not have labels indicating brand names. Since consumers cannot distinguish brand names, they may implicitly assign an average quality to each good. Thus, all firms in the industry share in developing and maintaining reputation.

This paper adapts previous models on asymmetric information, reputation, and quality to a situation where consumers do not observe a product's quality until after purchase and there is no brand name. Producers are heterogeneous in terms of their cost of production and choose between two discrete levels of quality (microbial safety). In this framework, the few lowest-cost firms produce high quality output and the rest produce at low quality. The higher-cost firms produce at low quality because of a free-rider problem. Each firm captures only a fraction of the reputational benefits from improving the quality of its output but incurs all of the costs. An increase in the cost of improving quality or an increase in the number of firms exacerbates the free-rider problem.

The presence of imports adds to this problem. A low-quality foreign producer both increases the number of firms in the industry and lowers industry-wide reputation. This reduces the incentive for firms to improve quality. The effect of a high-quality foreign producer entering the market is ambiguous. Under certain conditions, the positive reputational effects of the high-quality output outweighs the negative effect of an increase in the number of firms. The presence of a tariff increases the incentive for the foreign firm to produce at high quality.

Another factor influencing each firm's quality decision is consumer preference for quality. The extent to which prices react to quality (via reputation) gives an indication of the industry's willingness to undertake the costs of lowering the chances of microbial contamination, such as developing a HACCP plan or instituting GAPs. The demand response to a change in reputation is measured in the second part of this paper by examining price and quantity changes following news of an outbreak in the fresh strawberry and lettuce markets. These estimates give an indication of the benefits of improved quality in the form of food outbreaks avoided. If the cost of reducing food contamination is significantly larger that these estimates, a free-rider situation may arise discouraging firms from improving the quality of their output voluntarily.

1. T. W. Worth is an Economist at the Economic Research Service, U.S. Department of Agriculture. 1800 M Street, NW, Washington, DC 20036-5831. E-mail: tworth@econ.ag.gov.

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