Tainted Food, Low-Quality Products and Trade*

Please do not cite or quote without permission This paper examines international trade in tainted food and other low-quality products.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 provides the highest incentives for foreign exporters to produce non-tainted high-quality goods. However, free trade is neither a necessary nor a sufficient condition to exclude trade in tainted products. This condition is less easily satisfied if the marginal cost of high-quality production increases, or if Type I and Type II errors of testing product quality matter. We also examine cases of image-building investments and sabotage. In particular, sabotage by the domestic firm reduces the foreign firm’s incentives to produce high quality, and as a consequence tends to increase import tainting