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

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