Selection of Food Safety Standards
25
Selection of Food Safety Standards Bo-Hyun Cho Centers for Disease Control and Prevention Neal H. Hooker The Ohio State University Selected Paper prepared for presentation at the American Agricultural Economics Association Annual Meeting, Long Beach, California, July 23–26, 2006 Copyright 2006 by Bo-Hyun Cho and Neal H. Hooker. All rights reserved. Readers may make verbatim copies of theis document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies. This paper is a part of Bo-Hyun Cho’s dissertation in his private capacity. No official support or endorsement by the Centers for Disease Control and Prevention, Department of Human and Health Services is intended nor should be inferred.
Transcript of Selection of Food Safety Standards
Selection of Food Safety Standards
Bo-Hyun Cho
Centers for Disease Control and Prevention
Neal H. Hooker
The Ohio State University
Selected Paper prepared for presentation at the American Agricultural Economics
Association Annual Meeting, Long Beach, California, July 23–26, 2006
Copyright 2006 by Bo-Hyun Cho and Neal H. Hooker. All rights reserved. Readersmay make verbatim copies of theis document for non-commercial purposes by anymeans, provided that this copyright notice appears on all such copies.
This paper is a part of Bo-Hyun Cho’s dissertation in his private capacity. No official support orendorsement by the Centers for Disease Control and Prevention, Department of Human and HealthServices is intended nor should be inferred.
Abstract
Food safety regulations are evolving to more performance-based regimes in which firms
have greater flexibility and responsibility for adopting effective controls. Within this
context, this paper compares performance and process standards modeling the vari-
ability of industry-level compliance and therefore the resultant level of food safety.
Monte Carlo simulations are conducted manipulating five factors: the variances of
input use of efficient and inefficient firms, the proportion of inefficient firms in the
industry, the mean of the error term for inefficient firms, and the policymakers’ level
of risk aversion. Results suggest that process standards may be preferred over per-
formance standards when inefficient firms prevail in the industry, when input use
is highly variable and when the regulator pays less attention to the variability of
industry-level compliance and more to the level of the standard.
Keywords: Performance Standards, Process Standards, Food Safety, Monte Carlo
Simulation
JEL Classification: Q180 Agricultural Policy & Food Policy
Introduction
The design of socially optimal food safety standards has received increased atten-
tion in recent years. Food safety regulatory standards take three forms according to
Antle (2000)1; process (design), performance and combined standards. Performance
standards can be described as controls that regulate the upper limit (or maximum
tolerance level) of risk in food. Process standards require the firm to use at least a
minimal amount of a risk control input. In practice, most food safety regulations do
not neatly fall into one single category. Rather, regulations combine elements of both
process and performance standards as discussed in Unnevehr and Jensen (1996).
In this paper, we focus on two aspects of regulatory standards - control through
inputs or outputs. As one option a food safety regulation may apply a performance
standard requiring all food (output) to at least meet the required criterion2. Con-
versely, a process standard can be the basis of a regulation with a requirement that
firms use, at least, a particular level of a certain risk control input such as a steril-
izer, washing fluid, hot water or irradiation equipment. Comparing these standards,
1Standards can also be defined based on the degree of intervention. For example, Henson and
Heasman (1998) distinguish target, performance and specification standards. Target standards im-
pose liability for prespecified harmful consequences caused by products while no specific prescription
of the product is made. Performance standards dictate the safety level for the product while allowing
the firm to choose the method of production. Specification standards require either the product or
its’ production process or both meet a predefined goal.2An extreme example is the use of zero-tolerance standards for pathogens such as Listeria mono-
cytogens (Institute of Medicine, National Research Council, 2003)
1
economists seem confident of the superiority of performance standards in terms of
cost minimization (Antle, 1996), simply because performance standards allow for a
flexible adjustment to the firm’s unique production environment leading to lower dis-
tortions in the economy 3. From the perspective of social welfare optimization, the
argument is valid if benefits under two alternative standards are the same. This pa-
per examines if the two different standards provide the same level of benefit from the
viewpoint of food safety risk reduction.
Motivation
The model and motivation are an effort to characterize a regulator’s comparison of
these standards. Most of the existing literature has focused on incentives for compli-
ance by firms. Naturally, the standard with the lower compliance cost is preferred.
However, the regulator here is assumed to be more interested in the public health
impact of standards. That is, unable to observe the actual compliance behavior of
firms (e.g., managerial intensity or effort), the regulator needs to select a standard
which minimizes the probability of foodborne illness outbreaks and sporadic events.
Thus, the regulator is assumed to act like an investor balancing a portfolio, choosing
a standard less likely to result in deviation by firms in the relevant industry. The
approach applied here to compare the effectiveness of standards is therefore borrowed
from the field of financial economics: a safety-first rule. This is relevant as food
3See Marino (1998).
2
safety policy has a goal of not only minimizing the level of risk (standard) but also
the deviation around the standard given the stochastic nature of most food safety
attributes4.
Among other risk measures used in the area of financial economics, the safety-
first rule is simple and conservative, though old. As a key advantage, the measure
is distribution-free, providing an upper-bound of the probability of violation of the
standard. A process standard is assumed different from a performance standard in
the sense that the former requires a minimum level of input use directly affecting the
reduction of food risk. Contrast this to a performance standard which regulates out-
put quality. Therefore, a “truncated” distribution of input use supports the process
standard. It is obvious, therefore, that a process standard results in a lower (or no
greater) level of food safety risk. However, to compare the degree of public health pro-
tection, higher moments of the resultant food safety distribution must be assessed,
which quickly becomes intractable for even the most straightforward of standards.
Hence, simulation results are provided here to illustrate potential factors which may
influence the optional standard design.
Previous Research
Besanko (1987) showed that in an oligopolistic market the economic impact of dif-
4During food production, manufacturing, distribution and preparation, microbial pathogens may
be introduced, reduced or redistributed through cross-contamination while chemical and physical
hazards may be introduced or eliminated in a different manner.
3
ferent standards depends on demand and cost functions. Marino (1998) presented
evidence that process standards are preferred to performance standards if an asym-
metric information environment exists between the firm and the regulator. Recently,
Hueth and Melkonyan (2003) argued that process standards are different to design
standards in the presence of mandatory monitoring and asymmetric information.
Their approach compares expected social surplus under each standard to determine
the most efficient form. The model presented here is different, providing a focus on
possible stochastic deviations from the targeted level of food safety risk. When reg-
ulators evaluate or compare policies, the expected level of risk and variance of risk
control should be carefully considered. This situation is analogous to choosing a port-
folio of risky assets in financial economics. Various methods such as the safety-first
rule, mean-variance, stochastic dominance and other expected utility models can be
applied, as described below.
Models
The Setting
Assume that there are a finite number of firms producing food (N). Accordingly, N
types of firms (θ) are realized when drawn from a random variable Θ. The regulator
cannot tell which firm is of which type, but is assumed to know the distribution
of the random variable Θ. Assume that the targeted level of food safety risk s∗ is
4
given exogenously based on a science-based food safety risk assessment. Following
Lichtenberg and Zilberman (1988), the regulator is assumed to select a standard
which minimizes social cost while limiting the probability of violation of the food
safety target (s∗). Formally,
mini SCi (1)
subject to prob(si ≤ s∗) ≤ 1− p
where i ∈ {process, performance}, SCi refers to the resultant social cost under
a regulatory standard i, and si refers to the observed level of food safety. The op-
timization problem in equation (1) suggests which food safety standard minimizes
social cost given a certain level of food safety risk (or acceptable level of protection).
A simple cost-effectiveness analysis applies such a selection rule when comparing al-
ternatives. However, it is more common to see regulatory agencies being provided
a budget to implement a range of control policies. This is like the dual of the op-
timization problem: which standard minimizes the probability of violation given a
budget constraint? Furthermore, if the ex-post loss resulting from foodborne illness
is included within a more complete cost-benefit framework, the regulator is encour-
aged to select the policy with the lowest possibility of safety deviations. Such an
approach allows for deviations from the target, which may result in a food safety
recall or life-threatening outcomes such as foodborne illness outbreaks. The standard
selection problem becomes a broader comparison of risk, specifically, the probability
of violation under each standard.
5
Assumptions
Two types of players - the regulator and firms - are assumed throughout this paper.
Firms have multioutput technologies producing food and food safety risk jointly. Cost
minimization determines their optimal input level based on the targeted safety level
(s∗) set by the regulator.
Assumption A1 (Cost Minimization). The firm minimizes its cost constrained by a
production technology g(z|θ). Formally,
minz
wz + λ(s∗ − g(z| θ)) (2)
Input demand z∗ is a function of input prices w, s∗ and the firm type θ, z∗ =
z(w, s∗| θ). The optimal value function, a cost function, depends on input prices, the
targeted safety level and the type of firm, C∗ = w · z∗ = C(w, s∗| θ).
Asymmetric information about the firm’s technology is also assumed: the regula-
tor does not know which firm has the greater ability to apply a certain food safety
technology but does know the technology adopted. The food safety technology is
represented as a risk control function.
Assumption A2 (Risk Control Function). Food safety technology can be represented
as the following risk control function, gs.
s = gs(z| θ) (3)
where s is the resultant level of safety produced by the firm, z refers to risk control
inputs and θ is an index of the type of firm, determining the efficiency of risk control
6
achieved by a particular technology. The risk control function gs is non-decreasing in
input level z and type θ, ∂gs
∂z> 0, and ∂gs
∂θ> 0, respectively.
Firms are assumed to have different marginal products for their risk control inputs.
This assumption allows heterogeneity in firms technology. Efficient firms are assumed
to have higher marginal productivities of risk control input than inefficient firms 5.
Assumption A3 (Efficient Food Safety Technology). For θ0 > θ1,
∂gs
∂z
∣∣∣z=z∗, θ0
>∂gs
∂z
∣∣∣z=z∗, θ1
(4)
.
Risk Measures
As introduced above, this study compares the resultant levels and distributions of
food safety risk for process and performance standards. The financial decision-making
literature provides a large range of risk measures6. In quantitative studies, due to
limited knowledge of the true distribution, risk is often measured using moments
such as mean, variance, or a combination of both 7. Among other factors, it is
5Such heterogeneity can arise through differences in managerial efficacy or optimization error.6It is important to distinguish two concepts of risk: food safety risk and risk as a quantitative
measure. Food safety risk arises from the presence of hazards in food. In this paper the probability
of observing foodborne illness is modelled as a measure of risk.7For example, Domar and Musgrave (1944) formulate a quantitative measure of risk taking into
account all possible negative or relatively low probability outcomes. A dispersion parameter such
as variance or standard deviation is used as a risk index. A semi-variance measure uses a similar
7
important to measure risk resulting from the two different standards in a conservative
sense. Thus, Roy’s Safety First rule is used to provide one method to compare
probability. Roy (1952) suggests such a “safety first” rule for regulators trying to
avoid a “disaster.” His risk measure is represented in terms of the probability that
the outcome will be lower than a constant s∗, the acceptable level of risk determined by
the policymaker. However, given limited knowledge of the distribution, in particular
the mean (E(S)) and variance (σ2S) of outcomes, it is useful to elaborate on this
measure using Chebychev’s inequality to represent the probability of a “bad” event8.
An advantage of the safety first rule is that it provides an upper bound probability
of violation of the targeted food safety level. Therefore, using the safety first rule the
different distributions of food safety risk can be compared. More interestingly, the
risk measure allows for the interpretation of consequences of differences between the
two standards in terms of the probability of violation.
prob(S ≤ s∗) ≤ σ2S
(E(S)− s∗)2(5)
σ2S
(E(S)−s∗)2 is the upper bound of the probability of a disaster which can be used
to select the least risky standard. The greater the upper bound, the riskier the
standard. Intuitively, assuming the same mean values of two different distributions,
formula replacing the mean with a constant in order to consider only negative deviations from the
constant (Levy, 1998).8This inequality is useful as it provides a universal bound for probability regardless of the distri-
bution of the random variable (Casella and Berger, 1990).
8
the distribution with the larger variance will be riskier. For distributions with the
same variance, a larger mean value suggests a less likely disastrous outcome.
Recall that the optimal risk control input demand z∗(θ) depends on the type
of firm which is uncertain to the regulator. Suppose that the probability density
function of z, fZ(z) is also unknown to the regulator. For simplicity, assume that the
risk control function is a monotonic transformation of the random variable, Z. Then:
pr(z ≤ z∗) =
∫ z∗
0
fZ(x)dx (6)
pr(s ≤ s∗) =
∫ g−1(s∗)
0
fZ(g−1(y))d
dyg−1(y)dy (7)
Equations (6) and (7) show the probabilities that input use or the resultant safety
level respectively are lower than the predetermined targeted levels in terms of the
density function. Without knowing fZ(z) it is impossible to assess which standard is
riskier. In order to compare the upper bound of each standard, the expected value
and variance of the safety level under each regime must be calculated. Conceptually,
these measures can be calculated as follows. First, under the performance standard,
the expected value (Epf (S)) and variance (σ2pf ) are derived as follows.
Epf (S) =
∫ ∞
0
g(x)fZ(x)dx (8)
σ2pf =
∫ ∞
0
(g(x)− Eg(Z))2fZ(x)dx (9)
Since there is no restriction on input usage, the expected value and variance of the
safety level are calculated on the domain of Z.
However, under a process standard, because of the minimum input use require-
9
ment, the safety level is derived on [z∗, ∞]. Thus, the expected value (Epc(S)) and
variance (σ2pc) are defined as follows.
Epc(S) =
∫ ∞
z∗g(x)fZ(x)dx (10)
σ2pc =
∫ ∞
z∗(g(x)− Eg(Z))2fZ(x)dx (11)
Note that since g(z) is assumed to be a non-stochastic, monotonic transformation the
process standard is equivalent to the case of a combined standard. The comparison of
expected values and variances depends upon the parameter (z∗) and the distribution
(fZ(z)). To highlight the role of these factors a Monte Carlo simulation is presented
below.
Monte Carlo Simulations
Procedures
As assumed above firm type θk is exogenous, known to the firm but not perfectly
known to the regulator. The regulator is assumed to observe, imperfectly, the level
of risk-control input demands or final food safety level. For the purpose of the Monte
Carlo simulation a linear error term is assumed for the input demand function :
z∗(θk) = z∗ + θk for k = 1, 2, ... , N . Suppose that N firms are partitioned into two
groups: n1 inefficient firms and (N −n1) efficient firms. Accordingly, the distribution
of θi is assumed to differ for two different groups; θi for (N − n1) efficient firms and
θj for n1 inefficient firms. For simplicity, the risk control function is assumed to be
10
gs(z) = log10(z). The expected value of θj is assumed to be larger for inefficient firms9.
Finally, the resultant level and dispersion of food safety is calculated by inserting z,
drawn from the simulated distribution, into gs(z).
With these assumptions, sample means and variances of the safety level under a
performance standard can be calculated using the following equations based on N
randomly drawn input levels z∗θk.
Epf (S) =1
N
N∑
k=1
gs(zk) (12)
σ2pf =
1
(N − 1)
N∑
k=1
(gs(zk)− Epf (S))2 (13)
By the same token, the mean and variance of the safety level under a process stan-
dard can be calculated using N randomly drawn input levels ztr using a truncated
distribution at the critical value, z∗. An acceptance-rejection method is applied 10.
9The marginal product of the risk control function is 1/z so, by assumption 3, z∗(θi) = z∗+ θi >
z∗ + θj = z∗(θj). Therefore, θi > θj . To reflect this result, a larger mean for θi is assumed.10This method is used when the functional form of a distribution is difficult or time consuming
to generate random numbers. Assuming a “source” distribution considered close to the true dis-
tribution, draw a number from the source distribution then compare how close it is to the true
distribution. If considered close enough, accept the draw. Otherwise, repeat the same procedure.
For a detailed algorithm, refer to Martinez and Martinez (2001).
11
Epc(S) =1
N
N∑
k=1
gs(ztrk ) (14)
σ2pc =
1
(N − 1)
N∑
k=1
(gs(ztrk )− Epc(S))2 (15)
The experiments were designed to vary five parameters: the mean value of the
error term for inefficient firms, the variances of distributions of θi and θj (for efficient
and inefficient firms respectively), the proportion of inefficient firms in the industry
(ratio = n1
N× 100) and a risk-aversion parameter for the policymaker (h). The first
four parameters are related to characteristics of the industry of which the regulator has
a limited knowledge. The risk-aversion parameter represents the regulator’s attitude
toward risk from foodborne illness.
The distributions of θ and θ represent stochastic variations of risk control input
use by firms. The mean value of the error term for inefficient firms is set to be 110,
150 and 190 percent of the mean value of the distribution for efficient firms, 100. The
variances of the distributions represent the dispersion of risk-control inputs used by
the firms.
The proportion of inefficient firms in the industry reflects how many firms are
inefficient in controlling food safety risk, which can be determined through facility
inspection or monitoring. The parameter h captures the level of risk-aversion of the
regulator. Baumol’s risk measure (µ − h · σ) incorporates not only the mean value
of the resultant safety level but also its variability (Baumol, 1963). For larger h,
Baumol’s risk measure decreases, which penalizes deviations from the mean value.
12
When determining the targeted food safety level, a lower level of h suggests stricter
food safety control.
The variance of distributions of θ and θ is varied between 10 and 100 in units of
10. The proportion of inefficient firms in the industry ranges over 10 %, 30 %, 50 %,
70 %, to 90 %. The targeted safety level is assumed to be determined by µpf −h ·σpf
where, for this experiment, three different values of h are evaluated: 1, 3, and 5 11.
Based on these simulations, Roy’s risk measures are calculated for each standard.
This experiment is repeated 10,000 times using the Statistics Toolbox 4.0 installed in
MATLAB.
Results
Not surprisingly, resultant levels and dispersions of food safety risk are influenced by
all five parameters. Two presentations of the comparative risk measures under each
of the standards are provided - three-dimensional figures and a table, with illustrative
examples of parameter values.
First, the surfaces of Roy’s risk measures with varying mean values of risk-control
input use by inefficient firms are reported in Figures 1, 2, and 3. In each Figure,
the X-axis presents the variance of distribution of θ for inefficient firms while the
variance of distribution of θ assigned to efficient firms are represented on the Y-
11A value of h=0 implies that the regulator is risk neutral. In this experiment, the targeted level
is equal to the mean of resultant food safety level under a performance standard. Consequently, the
denominator of Roy’s risk measure becomes zero.
13
axis. Both axes range from 10 to 100. The Z-axis plots the Roy’s risk measures for
each standard. Thus, the surfaces represent differing risk measures corresponding to
changing variances. For the purpose of illustration 10, 50 and 90 % proportions of
inefficient firms in the industry are presented here. Note that under a performance
standard Roy’s risk measure simply becomes 1h2
12. Therefore, the surface becomes a
flat plane under a performance standard providing an easy comparison for the factors
which affect the relative risk measure under a process standard.
A review of the various Figures reveals some notable patterns. First, as the mean
of the distribution of risk-control input use by inefficient firms increases, Roy’s risk
measure under a process standard decreases. That is, when inefficient firms prevail,
a process standard may prove to be more effective by controlling the minimum use
of risk-control inputs. Therefore, when the regulator believes that the industry has
a considerable proportion of inefficient firms, optimal risk control occurs through a
process standard. However, it is also notable that there are two cases when a per-
formance standard is preferable to a process standard (Table 1). Second, as the
proportion of inefficient firms in the industry increases, so Roy’s risk measure under a
process standard also increases. Thus, compared to the results under a performance
standard, an increased proportion of inefficient firms may be more likely to harm the
safety reputation of the industry. Regarding the role of variances, when the propor-
12Recall that Roy’s risk measure is σ2S
(E(S)−s∗)2 . Substituting s∗ yields 1h2 under a performance
standard.
14
tion of inefficient firms is relatively low, as the variance of input use by inefficient
firms increases, so the risk measure under a process standard increases for any given
variance of input use by efficient firms. In contrast, the process standard risk measure
decreases as the variance of input use by efficient firms increases for a given variance
of input use by inefficient firms. However, as the proportion of inefficient firms and
the variance of input use by inefficient firms increases, the process standard risk mea-
sure decreases. The result that a larger variance associated with inefficient firm’s
input use influences the risk measure relatively less occurs because under a process
standard input use is clearly regulated. Therefore, even with a higher variance the
possibility of inefficient firms controlled by a process standard using a lower level of
the risk control input is greatly restricted. Yet, even a relatively low variance and
control through a process standard may be associated with higher overall risk for
food products if the industry is dominated by inefficient firms. When a higher h is
imposed, the risk measures under a process standard become closer to those under
a performance standard. For example, when h=2, the risk measure under a process
standard exceeds those under a performance standard in some cases such as those
with a small proportion of inefficient firms when the variance of inefficient firm’s in-
put use is large and the variance of efficient firm’s input use is small. The results
suggest that a performance standard can provide a riskier situation compared to a
process standard with the same targeted safety level (s∗) under specific conditions.
15
Summary and Discussion
In comparing standards, performance standards are most often preferred due to their
lower compliance costs. Yet such a comparison implicitly assumes that all standards
result in the same level of compliance or benefit. However, this paper compares the
effectiveness of risk reduction achieved by process and performance standards from
the viewpoint of a regulator with a limited administrative budget. Consequently,
unlike previous research such as Hueth and Melkonyan (2003), the approach presented
here characterizes stochastic deviations from a targeted level of safety. In addition,
this evaluation of standards focuses on the relationship between the regulator and an
industry consisting of many different types of firms while most other papers model the
compliance decision of an individual firm. By permitting such heterogeneity in food
safety technology or its management, one firm’s efforts towards compliance may not
mirror another firm’s experiences. From the viewpoint of a regulator concerned with
industry-level compliance and performance, incorporating the probability of deviation
from the standard is an important dimension of policy design and one which appears
to have received little attention. This paper is designed to explore such circumstances.
The results differ to the previously held belief that a performance standard is always
superior to a process standard. As an additional tool to traditional economic benefit-
cost analyses for policy evaluation, such a statistical simulation can help to highlight
the circumstances under which one standard may be preferred in terms of the average
resultant industry-level safety. The simulation presented here is designed to vary in
16
five factors: the variances of input use, the proportion of inefficient firms in the
industry, the mean of the error term for inefficient firms, and the degree of risk
aversion of the regulators. The prescription of a socially optimal food safety standard
based on this Monte Carlo experiment is that process standards may be preferred
over performance standards when inefficient firms prevail in the industry, when input
use is highly variable and when the regulator pays less attention to the variability of
industry-level compliance and more to the level of the standard.
17
Table 1: Summary of Preferred Standard based on Roy Risk Measure
The mean of the Risk Control Input Use by Inefficient Firms = 110
Proportion of Inefficient Firms
10 % 50 % 90 %
h = 1 Pc Pc Pc
h = 2 Pc Pc Pc
h = 3 Pc Pc Pc
The mean of the Risk Control Input Use by Inefficient Firms = 150
10 % 50 % 90 %
h = 1 Pc Pc Pc
h = 2 Pc Pc Pc
h = 3 Pc Pc Pf
The mean of the Risk Control Input Use by Inefficient Firms = 190
10 % 50 % 90 %
h = 1 Pc Pc Pc
h = 2 Pc Pc Pc
h = 3 Pc Pc Pf
Note: Pc suggests a process standard has a lower risk measure Pf a performance standard
is optimal.
18
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Roy Risk Measures
Figure 1: Roy’s Risk Measures under Performance and Process standard when the
mean value of risk-control input used by inefficient firms is 110% of the mean value
of efficient firms
19
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020
4060
8010
0
0
20
40
60
80
1000
0.2
0.4
0.6
0.81
1.2
σ2 z i
Roy
’s R
isk
Mea
sure
s w
ith 1
0% o
f Ine
ffici
ent F
irm (
h=1)
σ2 z j
Roy Risk Measures
Per
form
ance
Sta
ndar
dP
roce
ss S
tand
ard
020
4060
8010
0
0
20
40
60
80
1000
0.2
0.4
0.6
0.81
1.2
σ2 z i
Roy
’s R
isk
Mea
sure
s w
ith 5
0% o
f Ine
ffici
ent F
irms
(h=
1)
σ2 z j
Roy Risk Measures
020
4060
8010
0
0
20
40
60
80
1000
0.2
0.4
0.6
0.81
1.2
σ2 z i
Roy
’s R
isk
Mea
sure
s w
ith 9
0% o
f Ine
ffici
ent F
irms
(h=
1)
σ2 z j
Roy Risk Measures
020
4060
8010
0
0
20
40
60
80
1000
0.050.
1
0.150.
2
0.250.
3
σ2 z i
Roy
’s R
isk
Mea
sure
s w
ith 1
0% o
f Ine
ffici
ent F
irm (
h=3)
σ2 z j
Roy Risk Measures
Per
form
ance
Sta
ndar
dP
roce
ss S
tand
ard
020
4060
8010
0
0
20
40
60
80
1000
0.050.
1
0.150.
2
0.250.
3
σ2 z i
Roy
’s R
isk
Mea
sure
s w
ith 5
0% o
f ine
ffici
ent f
irms
(h=
3)
σ2 z j
Roy Risk Measures
020
4060
8010
0
0
20
40
60
80
1000
0.050.
1
0.150.
2
0.250.
3
σ2 z i
Roy
’s R
isk
Mea
sure
s w
ith 9
0% o
f ine
ffici
ent f
irms
(h=
3)
σ2 z j
Roy Risk Measures
020
4060
8010
0
0
20
40
60
80
1000
0.02
0.04
0.06
0.080.
1
σ2 z i
Roy
’s R
isk
Mea
sure
s w
ith 1
0% o
f ine
ffici
ent f
irm (
h=5)
σ2 z j
Roy Risk Measures
Per
form
ance
Sta
ndar
dP
roce
ss S
tand
ard
020
4060
8010
0
0
20
40
60
80
1000
0.02
0.04
0.06
0.080.
1
σ2 z i
Roy
’s R
isk
Mea
sure
s w
ith 5
0% o
f ine
ffici
ent f
irms
(h=
5)
σ2 z j
Roy Risk Measures
020
4060
8010
0
0
20
40
60
80
1000
0.02
0.04
0.06
0.080.
1
σ2 z i
Roy
’s R
isk
Mea
sure
s w
ith 9
0% o
f ine
ffici
ent f
irms
(h=
5)
σ2 z j
Roy Risk Measures
Figure 2: Roy’s Risk Measures under Performance and Process standard when the
mean value of risk-control input used by inefficient firms is 150% of the mean value
of efficient firms
20
������������
�������� � �� �� �����������������������������������������
020
4060
8010
0
0
20
40
60
80
1000
0.2
0.4
0.6
0.81
1.2
σ2 z i
Roy
’s R
isk
Mea
sure
s w
ith 1
0% o
f ine
ffici
ent f
irm (
h=1)
σ2 z j
Roy Risk Measures
Per
form
ance
Sta
ndar
dP
roce
ss S
tand
ard
020
4060
8010
0
0
20
40
60
80
1000
0.2
0.4
0.6
0.81
1.2
σ2 z i
Roy
’s R
isk
Mea
sure
s w
ith 5
0% o
f ine
ffici
ent f
irms
(h=
1)
σ2 z j
Roy Risk Measures
020
4060
8010
0
0
20
40
60
80
1000
0.2
0.4
0.6
0.81
1.2
σ2 z i
Roy
’s R
isk
Mea
sure
s w
ith 9
0% o
f ine
ffici
ent f
irms
(h=
1)
σ2 z j
Roy Risk Measures
020
4060
8010
0
0
20
40
60
80
1000
0.050.
1
0.150.
2
0.250.
3
σ2 z i
Roy
’s R
isk
Mea
sure
s w
ith 1
0% o
f ine
ffici
ent f
irm (
h=3)
σ2 z j
Roy Risk Measures
Per
form
ance
Sta
ndar
dP
roce
ss S
tand
ard
020
4060
8010
0
0
20
40
60
80
1000
0.050.
1
0.150.
2
0.250.
3
σ2 z i
Roy
’s R
isk
Mea
sure
s w
ith 5
0% o
f ine
ffici
ent f
irms
(h=
3)
σ2 z j
Roy Risk Measures
020
4060
8010
0
0
20
40
60
80
1000
0.2
0.4
0.6
0.81
σ2 z i
Roy
’s R
isk
Mea
sure
s w
ith 9
0% o
f ine
ffici
ent f
irms
(h=
3)
σ2 z j
Roy Risk Measures
020
4060
8010
0
0
20
40
60
80
1000
0.02
0.04
0.06
0.080.
1
σ2 z i
Roy
’s R
isk
Mea
sure
s w
ith 1
0% o
f ine
ffici
ent f
irm (
h=5)
σ2 z j
Roy Risk Measures
Per
form
ance
Sta
ndar
dP
roce
ss S
tand
ard
020
4060
8010
0
0
20
40
60
80
1000
0.02
0.04
0.06
0.080.
1
σ2 z i
Roy
’s R
isk
Mea
sure
s w
ith 5
0% o
f ine
ffici
ent f
irms
(h=
5)
σ2 z j
Roy Risk Measures
020
4060
8010
0
0
20
40
60
80
1000
0.02
0.04
0.06
0.080.
1
σ2 z i
Roy
’s R
isk
Mea
sure
s w
ith 9
0% o
f ine
ffici
ent f
irms
(h=
5)
σ2 z j
Roy Risk Measures
Figure 3: Roy’s Risk Measures under Performance and Process standard when the
mean value of risk-control input used by inefficient firms is 190% of the mean value
of efficient firms
21
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23
