Abstract
Problem definition: This paper investigates and compares two types of food safety auditing structures: decentralized and centralized audits. Academic/practical relevance: Decentralized food safety auditing systems are common among developing economies, that is, different tiers of a food supply chain are audited by separate government agencies. Such an auditing structure has been widely criticized as ineffective at mitigating food safety risks. Some developing countries began implementing centralized auditing systems as a remedy for the mis-coordination across local auditing agencies. We compare food safety outcomes and economical payoffs of the two auditing systems. Methodology: We study a parsimonious game-theoretic model of a one-supplier, one-buyer supply chain and two agencies auditing each tier of the supply chain, respectively. Under decentralized audits, each of the two agencies minimizes its individual cost, and their decisions are sequential; under centralized audits, the agencies minimize total agency cost and make auditing commitment up front. Results: We identify forces that drive equilibrium decisions under decentralized audits. The penalty-shield effect of an agency's auditing capability may lead to risky behavior by the supplier. The free-riding effect between the two agencies may lead to less auditing. A centralized commitment makes the agencies the leader in the game at the expense of them losing the flexibility to respond to the actions of supply chain members. The common objective under centralization strengthens the incentives for at least one agency to conduct an audit, but it may also induce the lower-cost, less-capable agency to audit. Hence, centralized audits can be detrimental to performance regarding both food safety outcomes and system payoff. Managerial implications: Changing the auditing structure from decentralization to centralization may fail to improve food safety and system payoff insofar as it may replace one form of inefficiency with another. Addressing the new inefficiencies should be part of the ongoing effort to enhance the efficacy of centralized audits.