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

Abstract

The mislabelling of agricultural and food products is one of the most common types of food fraud. Despite the frequency with which labelling fraud occurs, there is no empirical framework to study its welfare implications, the probability that it may occur, and the measures that can limit its occurrence. We present an empirical framework to study the economic consequences of food labelling fraud in a differentiated products food market. Such framework requires the availability of sales data and the use of an ‘attribute-space' demand model. The model is applied to the Italian extra-virgin olive oil market to simulate the occurrence of fraudulent ‘100 per cent Italian' claims. Our results indicate that potential consumer losses due to overpayments for a false claim are higher than manufacturer gains, suggesting that labelling fraud results in welfare losses and not just in welfare transfers. Simulation results indicate that the level of the current administrative fines is not likely to be effective to discourage ‘100 per cent Italian' labelling fraud. Imposing larger fines or other measures negatively affecting a firm's image could be more effective in deterring labelling fraud.