| Abstract | By using a two-period model with both adverse selection and moral hazard, we give an explanation for ‘the crisis of trust’ in China’s food industry. We show that the lack of trust in the government and the incompleteness in the inspection coverage of media are the cause of this crisis. If the ratio of bad firms is high, those chasing profits, who would have provided safe goods without the asymmetric information in the industry level, will imitate their bad competitors’ behavior and produce unsafe goods. Meanwhile, consumers will not trust the survivors in the crisis. It is more important to expand the inspection coverage than to improve the testing technology for solving the crisis of trust. |