Tainted Food, Low-Quality Products and Trade

This paper examines international trade in tainted food and other low-quality products. We first find that for a large class of environments, free trade is the trading system that conveys the highest incentives to produce non-tainted high-quality goods by foreign exporters. However, free trade cannot prevent the export of tainted products, and the condition for tainting to arise becomes more easily satisfied, if the marginal cost of high-quality production increases or if errors of testing product quality matter. We also examine cases of imagebuilding investments and sabotage of rivals, and find that a tariff in either case reduces the foreign firm’s incentives to produce high quality, which in turn tends to increase import tainting.