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Livestock Disease Indemnity Design When Moral Hazard is Followed by Adverse Selection

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  • Gramig, Benjamin M.
  • Horan, Richard D.
  • Wolf, Christopher A.

Abstract

Averting or limiting the outbreak of infectious disease in domestic livestock herds is an economic and potential human health issue that involves both the government and individual livestock producers. Producers have private information about preventive biosecurity measures they adopt on their farms prior to outbreak (ex ante moral hazard), and following outbreak they possess private information about whether or not their herd is infected (ex post adverse selection). We investigate how indemnity payments can be designed to provide incentives to producers to invest in biosecurity and report infection to the government, while simultaneously addressing the information asymmetry between producers and the government. We show how addressing the adverse selection problem leads to a risk-sharing tradeoff in the moral hazard problem. We compare the relative magnitude of the first- and second-best levels of biosecurity investment and indemnity payments to further demonstrate the tradeoff between risk-sharing and efficiency, and we discuss the implications for status quo U.S. policy.

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Bibliographic Info

Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida with number 6542.

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Date of creation: 2008
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Handle: RePEc:ags:aaea08:6542

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Keywords: Food Consumption/Nutrition/Food Safety; Livestock Production/Industries; Risk and Uncertainty;

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References

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  1. Hennessy, David A., 2005. "Behavioral Incentives, Equilibrium Endemic Disease, and Health Management Policy for Farmed Animals," Staff General Research Papers 12489, Iowa State University, Department of Economics.
  2. Richard D. Horan & Christopher A. Wolf, 2005. "The Economics of Managing Infectious Wildlife Disease," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(3), pages 537-551.
  3. Kuchler, Fred & Hamm, Shannon, 2000. "Animal disease incidence and indemnity eradication programs," Agricultural Economics, Blackwell, vol. 22(3), pages 299-308, April.
  4. Charles E. Hyde & James A. Vercammen, 1997. "Costly Yield Verification, Moral Hazard, And Crop Insurance Contract Form," Journal of Agricultural Economics, Wiley Blackwell, vol. 48(1-3), pages 393-407.
  5. Steven Shavell & A. Mitchell Polinsky, 2000. "The Economic Theory of Public Enforcement of Law," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 45-76, March.
  6. Mahul, Olivier & Gohin, Alexandre, 1999. "Irreversible Decision Making in Contagious Animal Disease Control under Uncertainty: An Illustration Using FMD in Brittany," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 26(1), pages 39-58, March.
  7. Bicknell, Kathryn & Wilen, James E. & Howitt, Richard E., 1999. "Public policy and private incentives for livestock disease control," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 43(4), December.
  8. Dasgupta, Partha S & Hammond, Peter J & Maskin, Eric S, 1979. "The Implementation of Social Choice Rules: Some General Results on Incentive Compatibility," Review of Economic Studies, Wiley Blackwell, vol. 46(2), pages 185-216, April.
  9. Harris, Milton & Raviv, Artur, 1979. "Optimal incentive contracts with imperfect information," Journal of Economic Theory, Elsevier, vol. 20(2), pages 231-259, April.
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Cited by:
  1. Tong Wang & David A. Hennessy, 2012. "Modeling Interdependent Participation Incentives: Dynamics of a Voluntary Livestock Disease Control Program," Center for Agricultural and Rural Development (CARD) Publications 12-wp527, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  2. Saak, Alexander E., 2012. "Infectious Disease Detection with Private Information," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124732, Agricultural and Applied Economics Association.
  3. David A. Hennessy & Tong Wang, 2013. "Strategic Interactions Among Private and Public Efforts when Preventing and Stamping Out an Highly Infectious Animal Disease," Center for Agricultural and Rural Development (CARD) Publications 13-wp541, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  4. Rault, Arnaud & Krebs, Stephane, 2011. "Livestock epidemics and catastrophic risk management: State of the art and prospects on economic dynamics," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114793, European Association of Agricultural Economists.
  5. Kobayashi, Mimako & Melkonyan, Tigran A., 2011. "Strategic Incentives in Biosecurity Actions: Theoretical and Empirical Analyses," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 36(2), August.
  6. Niemi, Jarkko K. & Lyytikainen, Tapani & Sahlstrom, Leena & Virtanen, Terhi & Lehtonen, Heikki, 2009. "Risk Classification in Animal Disease Prevention: Who Benefits from Differentiated Policy?," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49307, Agricultural and Applied Economics Association.
  7. Arnaud Rault & St├ęphane Krebs, 2011. "Catastrophic risk and risk management, what do we know about livestock epidemics? State of the art and prospects," Working Papers SMART - LERECO 201105, INRA UMR SMART.

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