Designing geographical indication institutions when stakeholders’ incentives are not perfectly aligned

Abstract

Purpose – Geographical Indications (GI) are complex and multi-purpose institutions. Their objectives include encouraging diversification of agricultural production, improving farmers’ income, countering depopulation of rural areas, satisfying consumer demand for high-quality good, and protecting consumers from food fraud. The authors argue that such objectives are not necessarily aligned as divergence may arise among stakeholders (such as farmers, consumers or rural communities) about the optimal design of the GI. The paper aims to discuss these issues. Design/methodology/approach – The authors developed a simple, static game-theory model describing the basic choices that a planner faces in designing a GI. Findings – The authors conclude that the optimal organization requires finding trade-offs among conflicting but equally desirable objectives. Perfect monitoring is not a sufficient condition to resolve such conflicts. Sub-consortia and flexible production agreements may increase the efficiency of a GI. Research limitations/implications – The authors described basic trade-offs in GI design using the simplest possible model. To this purpose the authors introduced limiting assumptions that may be relaxed in future research. The representation of the GI agreement focussed on the quality level only, abstracting from all other consideration. Using a static model prevented us from explicit modeling of (loss of) reputation effects. The simplifying assumptions about consumer behavior and cost functions have reduced the generality of the results. Extensions of the model may consider introducing additional elements in the GI agreement such as production areas or governance models, dynamic games and general functional forms. Practical implications – The authors found that in designing a GI: first, promotion approaches revolving around small groups of local leaders (i.e. efficient, high-quality producers) might overshoot quality, resulting in unsustainable production agreements; second, introducing degrees of flexibility in the production agreement may help achieving a sustainable GI; and finally, sub-consortia/optional labels may help dealing with producers’ heterogeneity. Social implications – The authors found that setting a high standard in the production agreement is not sufficient condition for delivering quality food to consumers, as producers might have incentive to commit frauds. A simple command and control approach to quality in GI’s is not always the most efficient strategy, because it may reduce participation. In designing the GI, the goals of identity preservation and food quality must be balanced with consideration of producers’ incentives. The involvement of producers in the design of the GI is a critical success driver. Yet, this practice can be problematic because of producers’ heterogeneity. Originality/value – The paper provides theoretical foundation for best practices in forming a GI, including: multi-stakeholder involvement, management of farmer heterogeneity and monitoring.

An empirical framework to study food labelling fraud: an application to the Italian extra‐virgin olive oil market

“…In spite of the large body of theoretical literature on food labels (see Bonroy and Constantatos (2015) for a review), only a few studies focus specifically on food fraud (Giannakas 2002; Hamilton and Zilberman 2006; Baksi and Bose 2007; Di Fonzo and Russo 2015). Some of these works found that third‐party certification can lower the incidence of fraud, preventing consumers' welfare losses and reducing inspection costs (Giannakas 2002).…”

“…This result holds even when certification is costly as long as certification cost offsets the ‘incentive‐to‐cheat' (Baksi and Bose 2007) leading to the number of firms selling products with credence attributes being inversely related to the incentive of mislabelling (Hamilton and Zilberman 2006). The study by Di Fonzo and Russo (2015) who study GI consortia creation find instead that under certain conditions, labelling fraud can be rationally tolerated by all the other consortium members.…”

Food fraud: economic insights into the dark side of incentives

“…Fraud is rarely analysed in markets characterised by common reputation and ‘nested names’, where firms simultaneously adopt a private brand and collective label(s) such as labels of Geographic Indication (GIs) (Moschini et al , Menapace & Moschini , Yu et al , Di Fonzo and Russo ). In such markets, establishing a collective reputation brand allows for vertical differentiation or, at least, a minimum quality standard.…”

“…However, some suggest that without strict regulation, mislabelling fraud is possible. Di Fonzo and Russo () explicitly model GI consortia formation, allowing consortium members to engage in fraud. Notably, these authors find as long as there is a positive probability, frauds go undetected, and if punishment is not perfect, then defecting firms prefer using the consortia label and commit fraud rather than not using the GI.…”

“…This increases incentives to engage in collective reputation and not to defect – even with imperfect public monitoring. This result is similar to Di Fonzo and Russo’s () conclusion that a command and control approach is not an efficient strategy to promote geographic indication (GI) and enforce higher quality.…”